Reassessment of the Fiscal Multiplier in Developing Countries: Regime-Switching Model

Michal Hlaváček, Ilgar Ismayilov () and Ayaz Zeynalov
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Ilgar Ismayilov: Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic

No 2020/4, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: The existing literature on fiscal policy has mainly employed linear models that found a small fiscal multiplier in developing economies. These findings challenge the importance and effectiveness of fiscal policy for these countries. However, linear models are not capable of distinguishing the size of the fiscal multiplier in different phases of economic cycles. Responding to some recent studies that confirm regime dependency of a fiscal multiplier, our model enriches the literature of regime-switching models using a nonlinear panel threshold vector autoregression (PTVAR) model to measure the size of the fiscal multiplier for developing countries. Our finding confirms asymmetry in the response of GDP with regard to the economic situation. The main result of our paper shows that the response of GDP to government expenditure shock during a recovery period for developing countries is double that for developed ones. Our results also confirm a significantly larger fiscal multiplier during recovery compared to economic downturn.

Keywords: Fiscal multiplier; developing countries; regime-switching; the panel threshold vector autoregression model (search for similar items in EconPapers)
JEL-codes: C54 E32 E62 G15 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2020-04, Revised 2020-04
New Economics Papers: this item is included in nep-mac and nep-ore
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Journal Article: Reassessment of the Fiscal Multiplier in Developing Countries: Regime-Switching Model (2021)
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