DP9010 What Determines Government Spending Multipliers?

Author(s): Giancarlo Corsetti, André Meier, Gernot Müller
Publication Date: March 2012
Keyword(s): exchange rate regime, financial crisis, fiscal policy, fiscal rules, government spending, Multiplier, public finances
JEL(s): E62, E63, F41
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9010

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.