How Big (Small?) are Fiscal Multipliers?

Ethan Ilzetzki, Enrique G. Mendoza, Carlos A. Végh

NBER Working Paper No. 16479
Issued in October 2010
NBER Program(s):   IFM

We contribute to the intense debate on the real 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 rate but zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are lower than in closed economies and (iv) fiscal multipliers in high-debt countries are also zero.

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This paper was revised on December 5, 2011

Acknowledgments

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