Exploring the Output Effect of Fiscal Policy Shocks in Low Income Countries

By Jiro Honda, Hiroaki Miyamoto, Mina Taniguchi

January 17, 2020

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Jiro Honda, Hiroaki Miyamoto, and Mina Taniguchi. Exploring the Output Effect of Fiscal Policy Shocks in Low Income Countries, (USA: International Monetary Fund, 2020) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

What do we know about the output effects of fiscal policy in low income countries (LICs)? There are very few empirical studies on the subject. This paper fills this gap by estimating the output effects of government spending shocks in LICs. Our analysis—based on the local projection method—finds that the output effects in LICs are markedly lower than those in AEs and marginally smaller than those in EMs. We also find that in LICs, the output effects are larger (i) during recessions; (ii) under a fixed exchange rate regime; and/or (iii) with higher quality of institutions. Our analysis could not confirm any statistically significant output effect under floating exchange rate regimes. For the estimation of the output effects of fiscal spending shocks, it is thus important to consider the state of the economy and the country’s structural characteristics. Our results imply that the output costs of fiscal adjustment in LICs may not be as large as previously thought, especially if adopted outside of a recession, based on cutting public consumption, and accompanied by reform to enhance institutions.

Subject: Exchange rate arrangements, Expenditure, Fiscal multipliers, Fiscal policy, Floating exchange rates, Foreign exchange

Keywords: Countercyclical fiscal policy, Exchange rate arrangements, Fiscal multipliers, Fiscal Policy, Fiscal policy shock, Floating exchange rates, Government spending shock, LIC economy, Low Income Countries, Output effect, Sub-Saharan Africa, WP

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/012
Stock No:

WPIEA2020012
ISBN:

9781513526034
ISSN:

1018-5941

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