Working Paper: CEPR ID: DP9010
Authors: Giancarlo Corsetti; Andr Meier; Gernot Müller
Abstract: This paper studies how the effects of government spending vary with the economic environment. Using a panel of OECD countries, we identify fiscal shocks as residuals from an estimated spending rule and trace their macroeconomic impact under different conditions regarding the exchange rate regime, public indebtedness, and health of the financial system. The unconditional responses to a positive spending shock broadly confirm earlier findings. However, conditional responses differ systematically across exchange rate regimes, as real appreciation and external deficits occur mainly under currency pegs. We also find output and consumption multipliers to be unusually high during times of financial crisis.
Keywords: exchange rate regime; financial crisis; fiscal policy; fiscal rules; government spending multiplier; public finances
JEL Codes: E62; E63; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government Spending Shock (H69) | Output (Y10) |
| Government Spending Shock (H69) | Consumption (E21) |
| Government Spending Shock (H69) | Private Investment (G31) |
| Government Spending Shock (H69) | Net Exports (F10) |
| Government Spending Shock during Financial Crises (E62) | Output (Y10) |
| Government Spending Shock during Financial Crises (E62) | Consumption (E21) |
| Government Spending Shock (H69) | Real Exchange Rate (F31) |
| Government Spending Shock under Pegged Exchange Rate (F31) | Output (Y10) |
| High Public Debt Levels (H69) | Fiscal Multipliers (E62) |