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Why Do Fiscal Multipliers Depend on Fiscal Positions?

Raju Huidrom (), Ayhan Kose, Jamus Lim and Franziska Ohnsorge
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Raju Huidrom: International Monetary Fund

Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum

Abstract: The fiscal position can affect fiscal multipliers through two channels. Through the Ricardian channel, households reduce consumption in anticipation of future fiscal adjustments when fiscal stimulus is implemented from a weak fiscal position. Through the interest rate channel, fiscal stimulus from a weak fiscal position heightens investors’ concerns about sovereign credit risk, raises economy-wide borrowing cost, and reduces private domestic demand. We document empirically the relevance of these two channels using an Interactive Panel Vector Auto Regression model. We find that fiscal multipliers tend to be smaller when fiscal positions are weak than strong.

Keywords: Fiscal multipliers; fiscal position; state-dependency; Ricardian channel; interest rate channel; business cycle. (search for similar items in EconPapers)
JEL-codes: E62 H50 H60 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2019-04
New Economics Papers: this item is included in nep-mac
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Working Paper: Why Do Fiscal Multipliers Depend on Fiscal Positions? (2019) Downloads
Working Paper: Why do fiscal multipliers depend on fiscal positions? (2019) Downloads
Working Paper: Why Do Fiscal Multipliers Depend on Fiscal Positions? (2019) Downloads
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