Estimating Fiscal Multipliers with Correlated Heterogeneity

52 Pages Posted: 9 Aug 2017

See all articles by Emmanouil Kitsios

Emmanouil Kitsios

International Monetary Fund (IMF)

Manasa Patnam

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)

Date Written: February 2016

Abstract

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

Suggested Citation

Kitsios, Emmanouil and Patnam, Manasa, Estimating Fiscal Multipliers with Correlated Heterogeneity (February 2016). IMF Working Paper No. 16/13, Available at SSRN: https://ssrn.com/abstract=3014026

Emmanouil Kitsios (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Manasa Patnam

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

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