What determines government spending multipliers?

• Published in: Economic policy Vol. 27; no. 72; pp. 521 - 565
• Main Authors: Corsetti, Giancarlo, Meier, André, Müller, Gernot J., Devereux, Michael B.
• Format: Journal Article
• Language: English
• Published: Oxford Blackwell Publishing 01-10-2012; Oxford University Press
• Subjects: Consumption; Economic conditions; Economic crises; Economic policy; Economic shock; Economic theory; Environmental health; Exchange rate regimes; Exchange rates; Finance; Financial crisis; Financial economics; Financial systems; Fiscal policy; Foreign exchange rates; Government spending; Gross domestic product; Macroeconomics; Manycountries; Public debt; Public expenditure; Real exchange rates; Studies
• ISSN: 0266-4658; 1468-0327
• DOI: 10.1111/j.1468-0327.2012.00295.x

This paper studies how the effects of government spending vary with the economic environment. Using a panel of OECD countries, we identify fiscal shocks as residuals from an estimated spending rule and trace their macroeconomic impact under different conditions regarding the exchange rate regime, public indebtedness, and health of the financial system. The unconditional responses to a positive spending shock broadly confirm earlier findings. However, conditional responses differ systematically across exchange rate regimes, as real appreciation and external deficits occur mainly under currency pegs. We also find output and consumption multipliers to be unusually high during times of financial crisis.