The effects of public debt accumulation and business cycle on government spending multipliers

El Mostafa Bentour

Applied Economics, 2022, vol. 54, issue 19, 2231-2256

Abstract: We examine the impact of public debt changes as well as the effects of the business cycle on the expenditure multipliers. We adopt the structural vector autoregressive (SVAR) methodology on quarterly data for a sample of 18 OECD countries. The results show that expenditure multipliers are sensitive to the fiscal position, particularly the public debt changes as well as the business cycle. In particular, fiscal multipliers recorded high size in recessions than in expansions, in line with the recent findings about fiscal multipliers. Considering the public debt, leads to larger multipliers in debt accumulation under recessions than in debt accumulation under expansions.Many studies confirmed weak fiscal multipliers in expansions than in recessions, while others confirmed lower multipliers for countries with weak fiscal position. Our paper adds to this literature by joining the two effects of the business cycle and fiscal position, showing that fiscal position acts to lower multipliers when debt is rather accumulated in times of expansion than in recessions. We conclude that in times of expansion, the accumulated public debt effects are likely transmitting through Ricardian equivalence effect and concerns from expected high long-term interest rate leading to crowding-out effect, thus, lowering fiscal multipliers.

Date: 2022
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DOI: 10.1080/00036846.2021.1985721

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