How Big are Fiscal Multipliers

How Big are Fiscal Multipliers - Determining the size of...

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vox Research-based policy analysis and commentary from leading economists How big are fiscal multipliers? New evidence from new data Ethan Ilzetzki Enrique G. Mendoza Carlos A. Vegh 1 October 2009 How much stimulus does spending provide? This column says that fiscal multipliers are much weaker in countries that have high debt, lower income, flexible exchange rates, and greater international openness. Policymakers should consider these characteristics when evaluating the benefits of any fiscal stimulus package. The economics profession did not and does not agree on one question that is critical in the evaluating governments’ responses to the crisis: How large is the stimulus impact of fiscal spending? In a January 2009 Wall Street Journal op-ed piece , Robert Barro argued that peacetime fiscal multipliers are essentially zero. Christina Romer (2009), Chair of President Obama’s Council of Economic Advisers, used multipliers as high as 1.6 in estimating the job gains that will be generated by the $787 billion stimulus package approved by Congress in February. The difference between Romer’s and Barro’s views of the world amounts to a staggering 3.7 million jobs by the end of 2010. If anything, the uncertainty regarding the size of fiscal multipliers in developing and emerging markets is even higher. A history of fiscal profligacy and spotty debt repayments calls into question the sustainability of any fiscal expansion. How does this financial fragility affect the size of fiscal multipliers? Does the exchange regime matter? What about the degree of openness? These are all critical policy questions that remain largely unanswered. New evidence from new data Data has long been the big hurdle to obtaining precise estimates of fiscal multipliers. In CEPR Policy Insight No. 39 , we present our estimates of the fiscal multipliers for developed and emerging economies using new quarterly data for 45 countries (20 high-income and 25 developing) spanning 1960 through 2007. Using this, we estimated fiscal multipliers for different groups of countries. 1 The main results are presented in more detail in our Policy Insight. Here is a brief summary of the highlights: Determining the size of the fiscal multiplier | vox - Research-based policy. .. http://www.voxeu.org/index.php?q=node/4036 1 of 8 9/14/2010 9:22 AM
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High-income versus developing countries Figure 1 shows the impulse response of GDP to a 1% shock to government consumption; dashed lines indicate the one-standard deviation band. While the impact response is higher in high-income countries (0.05%) than in developing countries (0.01%), the most striking difference is how much more persistent the output response is for high-income countries. Based on the impulse response depicted in Figure 1, we can compute the corresponding
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This note was uploaded on 03/08/2011 for the course ECON 602 taught by Professor Chugh during the Spring '11 term at Johns Hopkins.

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How Big are Fiscal Multipliers - Determining the size of...

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