A primer on fiscal multipliers

I had earlier written a post on fiscal multipliers expressing frustration that we still don’t know whether there is a multiplier or not.  There are so many economists saying so many things about fiscal multipliers.

IMF’s excellent Staff Position Notes has released a primer on fiscal multipliers. It also summarises recent papers findings on what the fiscal multiplier is.

Which multipliers should be used in specific applications and projections?

Fiscal multipliers have been calculated for some countries but should be carefully reexamined in light of the current events multipliers, mostly for advanced countries. Country circumstances, however, should be

. The table below summarizes estimates of multipliers, mostly for advanced countries. Country circumstances, however, should be  taken into account in arriving at the multiplier for a specific country. The factors mentioned at the beginning should be considered.

A rule of thumb is a multiplier (using the definition

ΔY/ΔG and assuming a constant interest rate) of 1.5 to 1 for spending multipliers in large countries, 1 to 0.5 for medium sized countries, and 0.5 or less for small open countries. Smaller multipliers (about half of the above values) are likely for revenue and transfers while slightly larger multipliers might be expected from investment spending. Negative multipliers are possible, especially if the fiscal stimulus weakens (or is perceived to weaken) fiscal sustainability.

So, all is country and context specific. See the table towards the end. It tells you how much a design of a particular study (whether it looks at taxes, spending, targeted programs, combination, etc) effects value of multiplier.

Finally what matters is this:

 

 

Is it a good idea to re-estimate the size of fiscal multipliers in the present situation?

Probably not, 

as the current economic situation is unique and the structural parameters have changed, negating a crucial estimation assumption. Past research on multiplier estimates, such as the studies summarized in the table below, can provide guidance in developing multiplier estimates, but judgment, based on current conditions, is important.

All you can do is shrug your shoulders and smile 🙂

One Response to “A primer on fiscal multipliers”

  1. Anchoring fiscal expectations is as important « Mostly Economics Says:

    […] bothered me quite a bit. I keep asking myself- why is research on fiscal policy usually about the various fiscal multipliers (whether higher with taxes or expenditures), impact in recessions etc etc. Why isn’t there adequate research on fiscal policy […]

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