Public expenditure multiplier across business cycle phases in an emerging economy: new empirical evidence and dimension

Paras Sachdeva (), Wasim Ahmad and N R Bhanumurthy
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Paras Sachdeva: Indian Institute of Technology Kanpur

Empirical Economics, 2024, vol. 66, issue 1, No 9, 279-299

Abstract: Abstract In this paper, we study the transmission and effectiveness of the public expenditure shock across business cycle phases in the Indian economy. The empirical results suggest that the deflationary impact of the public expenditure shock and the subsequent accommodative response of interest rates exhibit a countercyclical public expenditure multiplier during the contraction period. Moreover, the large and significant negative impact of the public expenditure shock on inflation and the interest rate has resulted in a larger public expenditure multiplier during a supply-side recession than a demand-side recession. Based on empirical evidence, we suggest that policymakers consider the presence of nonlinearities in the transmission and effectiveness of the public expenditure shock while taking fiscal policy measures.

Keywords: Indian economy; Countercyclical fiscal multipliers; Business cycle; Fiscal policy (search for similar items in EconPapers)
JEL-codes: C11 C32 E32 E62 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s00181-023-02457-z

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