Why Do Fiscal Multipliers Depend on Fiscal Positions?

43 Pages Posted: 26 Mar 2019

See all articles by Raju Huidrom

Raju Huidrom

World Bank

M. Ayhan Kose

Development Prospects Group at the World Bank

Jamus Jerome Lim

World Bank

Franziska Ohnsorge

World Bank

Date Written: March 20, 2019

Abstract

The fiscal position can affect fiscal multipliers through two channels. Through the Ricardian channel, households reduce consumption in anticipation of future fiscal adjustments when fiscal stimulus is implemented from a weak fiscal position. Through the interest rate channel, fiscal stimulus from a weak fiscal position heightens investors' concerns about sovereign credit risk, raises economy-wide borrowing cost, and reduces private domestic demand. The paper documents empirically the relevance of these two channels using an Interactive Panel Vector Auto Regression model. It finds that fiscal multipliers tend to be smaller when fiscal positions are weak than strong.

Keywords: Public Finance Decentralization and Poverty Reduction, Macro-Fiscal Policy, Public Sector Economics, Economic Adjustment and Lending, Macroeconomics and Economic Growth, Economic Policy, Institutions and Governance, Fiscal & Monetary Policy, Macroeconomic Management, Financial Crisis Management & Restructuring

Suggested Citation

Huidrom, Raju and Kose, M. Ayhan and Lim, Jamus Jerome and Ohnsorge, Franziska, Why Do Fiscal Multipliers Depend on Fiscal Positions? (March 20, 2019). World Bank Policy Research Working Paper No. 8784. Available at SSRN: https://ssrn.com/abstract=3360142

Raju Huidrom (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

M. Ayhan Kose

Development Prospects Group at the World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Jamus Jerome Lim

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Franziska Ohnsorge

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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