Estimating the impact of the financial cycle on fiscal policy

Beau Soederhuizen, Rutger Teulings () and Rob Luginbuhl
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Beau Soederhuizen: CPB Netherlands Bureau for Economic Policy Analysis
Rutger Teulings: CPB Netherlands Bureau for Economic Policy Analysis
Rob Luginbuhl: CPB Netherlands Bureau for Economic Policy Analysis

Empirical Economics, 2023, vol. 65, issue 6, No 6, 2669-2709

Abstract: Abstract We investigate the impact of the financial cycle on fiscal policy by estimating fiscal multipliers for different types of government spending that are contingent on two states determined by the financial cycle. To obtain our estimates, we extend the threshold VAR method from a single country to a panel of high-income countries. Our results indicate that the multiplier for government investment is affected by the state of the financial cycle: while the initial impact is positive for both states, in an upturn it turns negative, while in a downturn it remains positive. In the case of government consumption, the multiplier does not seem to significantly depend on the financial cycle. However, jointly conditioning on the financial and business cycles produces multipliers of government consumption which vary over the states of both cycles. This contrasts with the results for government investment which are left essentially unchanged by the joint conditioning on the four states defined by both cycles.

Keywords: Government spending multipliers; Credit markets; Financial cycles; Panel TVAR (search for similar items in EconPapers)
JEL-codes: C33 E62 G15 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s00181-023-02448-0

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