Estimating Conditional Functional Multipliers
Spending based fiscal adjustment requires decisions on when? and how much to cut public spending to minimise adveræ effects on economic growth. This requires precise estimates of the response of output to changes in the functional components of pub...
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| Language: | English |
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World Bank, Washington, DC
2018
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| Online Access: | http://documents.worldbank.org/curated/en/945631530886061466/Estimating-conditional-functional-multipliers http://hdl.handle.net/10986/30264 |
| Summary: | Spending based fiscal adjustment
requires decisions on when? and how much to cut public
spending to minimise adveræ effects on economic growth. This
requires precise estimates of the response of output to
changes in the functional components of public spending. I
call this the functional multiplier.I disaggregate
government spending in 36 low-income countries over the
Period 1984-2013 into its functional components. Using a
GMM-IV model with fuel subsidies as the instrument for
government spending I exploit difference in the length of
exposure to statehood as a proxy for current absorptive
capacity to estimate functional multipliers conditional on
absorptive capacity.The estimated functional multipliers
vary from -1.11 for economic ærvices to 1.82 for social
protection. I find that a one standard deviation change in
absorptive capacity yields a 18 percent larger multiplier
compared to the average level of absorptive capacity. A
similar exercise for contestability shows that a one
standard deviation change in contestability yields a 14
percent larger multiplier compared to the average level of
absorptive capacity. I subject the GMM-IV estimates to a
rigorous test to determine whether the estimated
relationships an causal and not simply spurious correlation.
Post-double LASSO estimates show that that the conditional
functional multipliers are precisely estimated and of the
same order of magnitude (though slightly larger) than the
GMM-IV estimates. To obtain multipliers for individual
countries (and not averages) I use a Bayesian iterative
shrinkage estimators. The shrinkage estimates show that
countries with higher than average absorptive capacity have
multipliers that are 15 percent larger than thoæ below the average. |
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