Fiscal Policy Multipliers in Small States

Ali Alichi, Ippei Shibata and Kadir Tanyeri

No 2019/072, IMF Working Papers from International Monetary Fund

Abstract: Government debt in many small states has risen beyond sustainable levels and some governments are considering fiscal consolidation. This paper estimates fiscal policy multipliers for small states using two distinct models: an empirical forecast error model with data from 23 small states across the world; and a Dynamic Stochastic General Equilibrium (DSGE) model calibrated to a hypothetical small state’s economy. The results suggest that fiscal policy using government current primary spending is ineffective, but using government investment is very potent in small states in affecting the level of their GDP over the medium term. These results are robust to different model specifications and characteristics of small states. Inability to affect GDP using current primary spending could be frustrating for policymakers when an expansionary policy is needed, but encouraging at the current juncture when many governments are considering fiscal consolidation. For the short term, however, multipliers for government current primary spending are larger and affected by imports as share of GDP, level of government debt, and position of the economy in the business cycle, among other factors.

Keywords: WP; real GDP; Government Spending; Fiscal Policy; Fiscal Multipliers; GDP cost; GDP effect; GDP impact; government investment multiplier; trend GDP; GDP statistics; cost of fiscal consolidation; effect of a consolidation; world GDP; GDP path; impacts of government consumption; fiscal multiplier; Public investment spending; Current spending; Government consumption; Caribbean; Global (search for similar items in EconPapers)
Pages: 39
Date: 2019-03-26
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Journal Article: Fiscal Policy Multipliers in Small States (2022)
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