Fiscal multipliers: size, determinants and policy

implications

Nina Lunić 2732/21

 What are fiscal multipliers?

Fiscal multipliers are defined as the ratio of a change in output (ΔY) to a

discretionary change in government spending or tax revenue (ΔG or ΔT)

For example, if a one dollar increase in government consumption in the United

States caused a 50 cent increase in U.S. GDP, then the government
consumption multiplier is 0,5.
 Specific fiscal multipliers

The Impact Multiplier = or The Impact Multiplier =

Multiplier at horizon i=
 Size of Fiscal Multipliers

Advanced economies
- Old studies

- New studies
 Size of Fiscal Multipliers

Emerging market economies and low-income countries

-Multipliers in EMEs and LICs are smaller than in Advanced Economies

- Some studies even conclude that multipliers are negative, particularly in the
longer term and when public debt is high
 Determinants of multipliers

Structural Conjunctural
factors
characteristics •The state of the
•Trade openness
•Labor market rigidity business cycle
•The size of automatic stabilizers •Degree of
•The exchange rate regime
•The debt level
monetary
•Public expenditure management accommodation
and revenue administration. to fiscal shocks
 Persistence of Fiscal Multipliers

The persistence of multipliers is NOT the same as the persistence of fiscal shock

These effects varies depending on several factors

 A Simple Method to Incorporate Fiscal Multipliers into
Macroeconomic Projections

Fiscal Shocks and GDP Forecasts

- It is easy to apply in a large number of countries;
- Controls various shocks;
- Takes into account a wide range of country and time specific factors;
- Deals with flows between fiscal and output variables, as the multiplier is a
“reduced form” estimate that measures the final effect of fiscal shock on
GDP.
 A Simple Method to Incorporate Fiscal Multipliers into
Macroeconomic Projections

Tips to Design a Fiscal Multiplier Template

-This template is done with the help of an excell table

-The template should combine estimates of fiscal multipliers, fiscal shocks
and a baseline GDP projection
-The template should be used as a complement to standard projection methods.
 Results of empirical research

-Focusing on the impact multiplier, may be misleading because fiscal stimulus

packages can only be implemented over time and there may be lags in the
economy’s response.
 Results of empirical research

-if it is foreign trade less than 60 percent of GDP is considered a closed

economy otherwise the economy is open.
 Conclusion

- To understand the macroeconomic effects, it is necessary to know fiscal

multipliers, their size and determinants.
-The negative economic shock caused by the COVID-19 pandemic was created
significant pressure on public finances of all countries.