Working Paper: NBER ID: w16479
Authors: Ethan Ilzetzki; Enrique G. Mendoza; Carlos A. Végh
Abstract: We contribute to the debate on the macroeconomic effects of fiscal stimuli by showing that the impact of government expenditure shocks depends crucially on key country characteristics, such as the level of development, exchange rate regime, openness to trade, and public indebtedness. Based on a novel quarterly dataset of government expenditure in 44 countries, we find that (i) the output effect of an increase in government consumption is larger in industrial than in developing countries, (ii) the fiscal multiplier is relatively large in economies operating under predetermined exchange rates but is zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are smaller than in closed economies; (iv) fiscal multipliers in high-debt countries are negative.
Keywords: Fiscal Multipliers; Government Consumption; Economic Policy
JEL Codes: E2; E6; F4; H5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in government consumption (H59) | positive output effect (E23) |
| increase in government consumption (H59) | negative output effect (initial response in developing countries) (F69) |
| fiscal multiplier in economies with predetermined exchange rates (E62) | exceeds one (Y60) |
| fiscal multiplier in economies with flexible exchange rates (E62) | negative multipliers (C39) |
| openness to trade (F10) | inversely affects fiscal multipliers (E62) |
| high-debt countries (debt > 60% of GDP) (F34) | negative fiscal multiplier (E62) |
| government investment in developing countries (O19) | positive multiplier greater than one in the long run (E23) |
| government consumption (E20) | negative impact in developing countries (F63) |