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Fiscal space and the size of the fiscal multiplier

Luca Metelli () and Kevin Pallara ()
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Kevin Pallara: University of Lausanne

No 1293, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper investigates the interaction between fiscal policy transmission and fiscal sustainability, captured through the concept of fiscal space. In order to measure the evolution of fiscal space over time we propose four indicators, drawing from different concepts available in the literature. We use these indicators to define periods of ample and tight fiscal space. We then estimate the effects of government spending shocks in the United States according to the level of fiscal space, for the period 1929:Q1-2015:Q4. The main result of the paper is that fiscal multiplier is above one when fiscal space is ample, while it is below one when fiscal space is tight. Moreover, such difference is always significant. This result is very robust across different identification methods and samples.

Keywords: Fiscal multipliers; Fiscal space; State-dependency; Local projection; Fiscal sustainability; Government spending (search for similar items in EconPapers)
JEL-codes: E62 H50 H60 (search for similar items in EconPapers)
Date: 2020-09
New Economics Papers: this item is included in nep-mac
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