Do Fiscal Multipliers Depend on Fiscal Positions?
This paper analyzes the relationship between fiscal multipliers and fiscal positions of governments using an Interactive Panel Vector Auto Regression model and a large data-set of advanced and developing economies. The methodology permits tracing t...
| Main Authors: | , , , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2016/06/26533514/fiscal-multipliers-depend-fiscal-positions http://hdl.handle.net/10986/24641 |
| Summary: | This paper analyzes the relationship
between fiscal multipliers and fiscal positions of
governments using an Interactive Panel Vector Auto
Regression model and a large data-set of advanced and
developing economies. The methodology permits tracing the
endogenous relationship between fiscal multipliers and
fiscal positions while maintaining enough degrees of freedom
to draw sharp inferences. The paper reports three major
results. First, the fiscal multipliers depend on fiscal
positions: the multipliers tend to be larger when fiscal
positions are strong (i.e. when government debt and deficits
are low) than weak. For instance, the long-run multiplier
can be as large as unity when the fiscal position is strong,
while it can be negative when the fiscal position is weak.
Second, these effects are separate and distinct from the
impact of the business cycle on the fiscal multiplier.
Third, the state-dependent effects of the fiscal position on
multipliers is attributable to two factors: an interest rate
channel through which higher borrowing costs, due to
investors' increased perception of credit risks when
stimulus is implemented from a weak initial fiscal position,
crowd out private investment; and a Ricardian channel
through which households reduce consumption in anticipation
of future fiscal adjustments. |
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