Why Do Fiscal Multipliers Depend on Fiscal Positions?

43 Pages Posted: 27 Mar 2019

See all articles by Raju Huidrom

Raju Huidrom

International Monetary Fund

M. Ayhan Kose

Development Prospects Group at the World Bank

Jamus J. Lim

ESSEC Business School

Franziska Ohnsorge

World Bank

Date Written: March 26, 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. We document empirically the relevance of these two channels using an Interactive Panel Vector Auto Regression model. We find that fiscal multipliers tend to be smaller when fiscal positions are weak than strong.

Keywords: fiscal multipliers, fiscal position, state-dependency, Ricardian channel, interest rate channel, business cycle

JEL Classification: E62, H50, H60

Suggested Citation

Huidrom, Raju and Kose, M. Ayhan and Lim, Jamus J. and Ohnsorge, Franziska, Why Do Fiscal Multipliers Depend on Fiscal Positions? (March 26, 2019). CAMA Working Paper No. 28/2019. Available at SSRN: https://ssrn.com/abstract=3360720 or http://dx.doi.org/10.2139/ssrn.3360720

Raju Huidrom

International Monetary Fund ( email )

M. Ayhan Kose (Contact Author)

Development Prospects Group at the World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Jamus J. Lim

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

Franziska Ohnsorge

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
3
Abstract Views
67
PlumX Metrics