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Why Do Fiscal Multipliers Depend on Fiscal Positions?

Raju Huidrom, Ayhan Kose, Jamus Lim and Franziska Ohnsorge

No 8784, Policy Research Working Paper Series from The World Bank

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. The paper documents empirically the relevance of these two channels using an Interactive Panel Vector Auto Regression model. It finds that fiscal multipliers tend to be smaller when fiscal positions are weak than strong.

Keywords: Public Finance Decentralization and Poverty Reduction; Macro-Fiscal Policy; Public Sector Economics; Economic Adjustment and Lending; Macroeconomics and Economic Growth; Economic Policy; Institutions and Governance; Fiscal&Monetary Policy; Macroeconomic Management; Financial Crisis Management&Restructuring (search for similar items in EconPapers)
Date: 2019-03-20
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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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