Working Paper: CEPR ID: DP13648
Authors: Raju Huidrom; Ayhan Kose; Jamus Lim; Franziska Ohnsorge
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
JEL Codes: E62; H50; H60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| weak fiscal position (high debt) (H68) | smaller fiscal multipliers (E62) |
| weak fiscal position (high debt) (H68) | increased expectations of tax hikes (H29) |
| increased expectations of tax hikes (H29) | reduced consumption (E21) |
| weak fiscal position (high debt) (H68) | heightened credit risk (G21) |
| heightened credit risk (G21) | higher borrowing costs (G21) |
| higher borrowing costs (G21) | crowding out of private investment and consumption (E62) |
| reduced consumption and investment (E20) | smaller fiscal multipliers (E62) |