Getting into the Nitty-Gritty of Fiscal Multipliers: Small Details, Big Impacts

February 10, 2023

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José Federico Geli, and Afonso S. Moura Getting into the Nitty-Gritty of Fiscal Multipliers: Small Details, Big Impacts, (USA: International Monetary Fund, 2023) accessed December 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

The lack of a standardized framework to report fiscal multipliers limits comparisons across studies, budgetary items, or countries. Within a unified analytical framework (using a panel of 177 countries), we study how key methodological details affect the size and persistence of fiscal multipliers‘ estimates. Our baseline results are in line with the existing literature with average cumulative medium-term multipliers of -2.1 (-2.5) for taxes on personal income, 0.3 (1.7) for investment and, -0.5 (1.9) for consumption for advanced (emerging market) economies. However, we show that slight changes in the identification of shocks, based on forecast errors or in the definition of the fiscal multiplier, can artificially increase both the size and decrease the precision of estimates. We also emphasize the importance of accounting for the endogenous dynamic responses of fiscal variables to fiscal innovations by showing that multipliers calculated simply as the output response to fiscal shocks, as it is common in the literature, can potentially bias the results.

Subject: Consumption, Expenditure, Fiscal multipliers, Fiscal policy, National accounts, Personal income tax, Public investment spending, Taxes

Keywords: Accumulation procedure, Baseline result, Consumption, Consumption shock, Empirical estimate, Estimating multiplier, Fiscal multipliers, Fiscal multipliers., Fiscal policy, Fiscal shock, Forecast error, Government investment multiplier, Limits comparison, Multiplier definition, Multiplier estimate, Multiplier heterogeneity, Personal income tax, Public investment spending

Publication Details

Pages:

49
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/029
Stock No:

WPIEA2023029
ISBN:

9798400231629
ISSN:

1018-5941

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