Estimating Fiscal Multipliers with Correlated Heterogeneity
52 Pages Posted: 9 Aug 2017
Date Written: February 2016
We estimate the average fiscal multiplier, allowing multipliers to be heterogeneous across countries or over time and correlated with the size of government spending. We demonstrate that this form of nonseparable unobserved heterogeneity is empirically relevant and address it by estimating a correlated random coefficient model. Using a panel dataset of 127 countries over the period 1994-2011, we show that not accounting for omitted heterogeneity produces a significant downward bias in conventional multiplier estimates. We rely on both crosssectional and time-series variation in spending shocks, exploiting the differential effects of oil price shocks on fuel subsidies, to identify the average government spending multiplier. Our estimates of the average multiplier range between 1.4 and 1.6.
Keywords: Panel analysis, Economic theory, Fiscal policy, Government expenditures, Economic growth, Fiscal Multipliers, Nonseparable Unobserved Heterogeneity, Oil Price, Models with Panel Data
JEL Classification: C33, E62, H23, E23
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