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

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

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)

World Bank

1818 H Street, NW
Washington, DC 20433
United States

Brookings Institution

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Australian National University (ANU)

Canberra, Australian Capital Territory 2601
Australia

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

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