Why do fiscal multipliers depend on fiscal Positions?

• Published in: Journal of monetary economics Vol. 114; pp. 109 - 125
• Main Authors: Huidrom, Raju, Kose, M. Ayhan, Lim, Jamus J., Ohnsorge, Franziska L.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-10-2020
• Subjects: Business cycle; Fiscal multipliers; Fiscal position; Interest rate channel; Ricardian channel; State-dependency; State-dependency; E62; Interest rate channel; Fiscal position; H50; H60; Business cycle; Ricardian channel; Fiscal multipliers
• ISSN: 0304-3932; 1873-1295
• DOI: 10.1016/j.jmoneco.2019.03.004

•Weak fiscal positions can lower fiscal multipliers through two channels.•The Ricardian channel implies households lower consumption in expectation of fiscal consolidation.•The interest rate channel implies investor concerns about sovereign risk raise borrowing cost.•We document the empirical relevance of these two channels.•We find that multipliers tend to be smaller when fiscal positions are weaker.
The fiscal position can affect fiscal multipliers through two channels. Through the Ricardian channel, households reduce consumption in anticipation of future fiscal adjustments when fiscal stimulus is implemented from a weak fiscal position. Through the interest rate channel, fiscal stimulus from a weak fiscal position heightens investors’ concerns about sovereign credit risk, raises economy-wide borrowing cost, and reduces private domestic demand. We document empirically the relevance of these two channels using an Interactive Panel Vector Auto Regression model. We find that fiscal multipliers tend to be smaller when fiscal positions are weak than strong.