Government Expenditure in India: Composition and Multipliers

Ashima Goyal and Bhavyaa Sharma
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Bhavyaa Sharma: NIPFP

Journal of Quantitative Economics, 2018, vol. 16, issue 1, No 3, 47-85

Abstract: Abstract We estimate fiscal multipliers for total, capital (capex), and revenue (revex) Indian government expenditure using a two variable Structural Vector Auto-Regression (SVAR). Our quarterly data allows us to estimate both short- and long-run multipliers. We then extend and re-estimate the model including supply shocks and the monetary policy response sequentially and together and re-estimate the multipliers. The long-run capex multiplier remains much larger than the corresponding revex multiplier in all the estimations. The short run impact multiplier is the highest for revex, but does not rise after the first quarter. The capex peak multiplier in the 2nd quarter is 1.6–1.9 times larger. The cumulative multiplier is also the highest for capex, 2.4–6.5 times the size of the revex multiplier. Capex also reduces inflation more over the long-term. Despite this, capex shows greater volatility since it is more vulnerable to discretionary cuts. Monetary accommodation of capex and revex is allowed to differ. It varies in the absence/presence of supply shocks. The combination of a direct cut in capex and monetary tightening in response to a supply shock reduces the capex multiplier. The results are consistent with an elastic long-run aggregate supply. Disaggregated evaluation of spending policy, therefore, gives useful insights.

Keywords: Fiscal multiplier; SVAR; Revenue expenditure; Capital expenditure; Fiscal–Monetary coordination; Supply shocks; C32; E31; E62; E63; H50 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s40953-018-0122-y

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