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The Size of Fiscal Multipliers and the Stance of Monetary Policy in Developing Economies

Jair Ojeda-Joya () and Oscar E. Guzman ()

No 106, IEER Working Papers from Institute of Empirical Economic Research, Osnabrueck University

Abstract: In this paper we estimate the effect of government consumption shocks on GDP using a panel of 21 developing economies. Our goal is to better understand the reasons for the low fiscal multipliers found in the literature by performing estimations for alternative exchange rate regimes, business-cycle phases, and monetary policy stances. In addition, we perform counterfactual simulations to analyze the possible gains from fiscal-monetary policy coordination. The results imply that government consumption shocks are usually followed by monetary policy tightening in developing economies with flexible regimes. Our simulations show that this reaction partially explains the presence of low fiscal multipliers in these economies. On the other hand, we find that government consumption shocks imply higher multipliers in developing economies during fixed regimes, economic booms or monetary expansions. In particular, implementing fiscal programs during monetary expansions seems to improve significantly their economic stimulus.

Keywords: Fiscal Policy; Monetary Policy; Structural Vector Autoregression; Exchange Rate Regime; Panel VAR (search for similar items in EconPapers)
JEL-codes: E62 E63 F32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp and nep-mac
Date: 2017-06-13
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Related works:
Journal Article: THE SIZE OF FISCAL MULTIPLIERS AND THE STANCE OF MONETARY POLICY IN DEVELOPING ECONOMIES (2019) Downloads
Working Paper: The Size of Fiscal Multipliers and the Stance of Monetary Policy in Developing Economies (2017) Downloads
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