Do Fiscal Multipliers Depend on Fiscal Positions?

39 Pages Posted: 19 Jul 2016

See all articles by Raju Huidrom

Raju Huidrom

World Bank

M. Ayhan Kose

World Bank; Brookings Institution; Centre for Economic Policy Research (CEPR); Australian National University (ANU)

Jamus Jerome Lim

World Bank

Franziska Ohnsorge

World Bank; Centre for Economic Policy Research (CEPR); Australian National University (ANU) - Crawford School of Public Policy

Multiple version iconThere are 3 versions of this paper

Date Written: June 22, 2016

Abstract

This paper analyzes the relationship between fiscal multipliers and fiscal positions of governments using an Interactive Panel Vector Auto Regression model and a large data-set of advanced and developing economies. The methodology permits tracing the endogenous relationship between fiscal multipliers and fiscal positions while maintaining enough degrees of freedom to draw sharp inferences. The paper reports three major results. First, the fiscal multipliers depend on fiscal positions: the multipliers tend to be larger when fiscal positions are strong (i.e. when government debt and deficits are low) than weak. For instance, the long-run multiplier can be as large as unity when the fiscal position is strong, while it can be negative when the fiscal position is weak. Second, these effects are separate and distinct from the impact of the business cycle on the fiscal multiplier. Third, the state-dependent effects of the fiscal position on multipliers is attributable to two factors: an interest rate channel through which higher borrowing costs, due to investors' increased perception of credit risks when stimulus is implemented from a weak initial fiscal position, crowd out private investment; and a Ricardian channel through which households reduce consumption in anticipation of future fiscal adjustments.

Keywords: Industrial Economics, Consumption, Economic Theory & Research, Fiscal & Monetary Policy, Economic Growth, Economic Conditions and Volatility

Suggested Citation

Huidrom, Raju and Kose, M. Ayhan and Lim, Jamus Jerome and Ohnsorge, Franziska, Do Fiscal Multipliers Depend on Fiscal Positions? (June 22, 2016). World Bank Policy Research Working Paper No. 7724, Available at SSRN: https://ssrn.com/abstract=2811373

Raju Huidrom

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

M. Ayhan Kose

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Jamus Jerome Lim

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Franziska Ohnsorge (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Australian National University (ANU) - Crawford School of Public Policy ( email )

ANU College of Asia and the Pacific
J.G. Crawford Building, #132, Lennox Crossing
Canberra, Australian Capital Territory 0200
Australia

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