The Return of Expansionary Austerity: Firms’ Investment Response to Fiscal Adjustments in Emerging Markets

Nicolas Magud and Samuel Pienknagura

No 2022/070, IMF Working Papers from International Monetary Fund

Abstract: We study the response of corporate investment in Emerging Markets to unexpected fiscal shocks. We find that, although firm-level investment decreases on impact following unexpected public expenditure adjustments (classical Keynesian multiplier effect), it quickly rises above pre-shock levels. The rebound in investment is facilitated by fiscal space, flexible exchange rates, and more predictable fiscal policy. We also show that the composition of fiscal adjustments matters for investment’s response—compared to public investment adjustments, reductions in public consumption lead to larger private investment contractions on impact, but drive private investment to above pre-shock levels. Finally, we exploit firm-level heterogeneity in several dimensions, including to show that corporate investment’s recovery is stronger in firms in the tradable sector and in larger and less indebted firms, and to show that the long-run benefits to economic activity of the fiscal shock appear to outweigh its short-run costs.

Keywords: Fiscal shocks; adjustment; corporate investment; emerging markets; firms' investment response; rebound in investment; government expenditure Forecast Error; firm level; sales growth; Fiscal consolidation; Corporate investment; Capital adequacy requirements; Middle East and Central Asia; Europe; Africa; Global; Asia and Pacific (search for similar items in EconPapers)
Pages: 55
Date: 2022-04-08
New Economics Papers: this item is included in nep-fdg, nep-mac and nep-ore
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Journal Article: The return of expansionary austerity: Firms' investment response to fiscal adjustments in emerging markets (2024)
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