Getting into the Nitty-Gritty of Fiscal Multipliers: Small Details, Big Impacts

José Federico Geli and Afonso S. Moura

No 2023/029, IMF Working Papers from International Monetary Fund

Abstract: The lack of a standardized framework to report fiscal multipliers limits comparisons across studies, budgetary items, or countries. Within a unified analytical framework (using a panel of 177 countries), we study how key methodological details affect the size and persistence of fiscal multipliers‘ estimates. Our baseline results are in line with the existing literature with average cumulative medium-term multipliers of -2.1 (-2.5) for taxes on personal income, 0.3 (1.7) for investment and, -0.5 (1.9) for consumption for advanced (emerging market) economies. However, we show that slight changes in the identification of shocks, based on forecast errors or in the definition of the fiscal multiplier, can artificially increase both the size and decrease the precision of estimates. We also emphasize the importance of accounting for the endogenous dynamic responses of fiscal variables to fiscal innovations by showing that multipliers calculated simply as the output response to fiscal shocks, as it is common in the literature, can potentially bias the results.

Keywords: Fiscal policy; Fiscal multipliers.; multiplier estimate; estimating multiplier; government investment multiplier; empirical estimate; multiplier definition; fiscal shock; Public investment spending; Fiscal multipliers; Personal income tax; Consumption; accumulation procedure; forecast error; baseline result; limits comparison; consumption shock; multiplier heterogeneity (search for similar items in EconPapers)
Pages: 49
Date: 2023-02-10
New Economics Papers: this item is included in nep-pbe and nep-pub
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