## _spn0911 - 1.8 on capital spending, and 1 for other spending. Cross-country VAR estimates of fiscal ## Source details **Canonical URL:** [_spn0911 - 1.8 on capital spending, and 1 for other spending. Cross-country VAR estimates of fiscal](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/spn/2009/_spn0911.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/spn/2009/_spn0911.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/spn/2009/_spn0911.pdf.json) --- ### Overview and rule of thumb - Cross-country VAR estimates of fiscal multipliers in LICs range from negative to 0.5. - Rule of thumb (using the definition ∆Y/∆G and assuming a constant interest rate): - Spending multipliers in large countries: 1.5 to 1 - Spending multipliers in medium sized countries: 1 to 0.5 - Spending multipliers in small open countries: 0.5 or less - Smaller multipliers (about half of the above values) are likely for revenue and transfers. - 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. ### Factors influencing multiplier size - Country-specific circumstances and the factors noted at the beginning of the text should be taken into account when choosing a multiplier for a specific country. - Degree of financial market development: - Poorly developed financial markets limit consumption and investment smoothing, which should increase multipliers. - In countries with limited access to financial markets, governments can issue debt only at very high interest rates, which decreases the size of multipliers. - In financially repressed countries, governments can issue bonds to ‘captive’ domestic savers, thereby lowering financing costs and raising multipliers. - Impact of the financial crisis (effects are uncertain and can work in opposite directions): - Increased precautionary saving (example: 2008 U.S. tax rebate appears to have been largely saved) → reduces marginal propensity to consume and lowers multipliers. - Deleveraging increases the proportion of credit constrained consumers and firms → raises multipliers. - Monetary policy extremely accommodative, short rate close to zero, commitment to keep it there → increases considerably the size of multipliers. - Institutional features: - Policies vary in efficiency and implementation timing (e.g., developing a new social safety net vs enhancing existing ones; new investment projects take longer than speeding up delivery of existing projects). - Accounting for institutional features generally requires additional, policy-specific information. ### Temporary vs permanent measures - Effect depends on the fiscal measure: - Temporary reductions in income taxes: reduce sustainability concerns but, for forward-looking consumers, have less effect on consumption. - Temporary measures that trigger intertemporal reallocation (temporary decreases in taxes on automobiles, VAT rates, investment tax credits) can be powerful, although small VAT cuts may not be “visible enough.” - Rule of thumb: permanent measures give a higher multiplier than temporary measures for interventions working through income (e.g., tax cuts); for interventions working through prices (e.g., VAT reductions, investment tax credits) temporary measures can give larger multipliers because changes in relative intertemporal prices affect consumption timing. - Note: The Elasticity of Intertemporal Substitution (EIS) can be assumed to equal 1 for nondurable goods (as stated). ### Methodologies to calculate fiscal multipliers - Four broad methodologies: - Model simulations: ISLM-like models with little forward-looking behavior tend to produce positive multipliers by construction; multipliers small or negative if fiscal sustainability is in question, agents are forward looking, or monetary policy is not accommodative. - Case studies: identify truly exogenous fiscal expansions (e.g., Romer and Romer (2008) tax policy changes); results are specific to measure and prevailing macro conditions. - Vector auto-regressions (VARs): require correct identification of exogenous movements in public expenditure or taxes; implicitly take into account monetary policy response. - Econometric studies of consumer behavior: focus on individual consumption response to income changes and provide direct, partial equilibrium effects. - Empirical challenge: - Simultaneity bias: a fiscal expansion in response to a negative exogenous shock can yield an observed increase in the deficit with little change in output, biasing multipliers downward. - Higher frequency data and attention to implementation lags reduce simultaneity bias. ### Are multipliers reliable? Re-estimation in the present situation - The profession disagrees on reliability because of methodological differences and wide ranges of estimates, even for similar methods. - Any multiplier estimate must state the assumptions under which it is valid. - Re-estimating multipliers in the present situation is probably not advisable because the current economic situation is unique and structural parameters have changed, negating a crucial estimation assumption. - Past research summarized in the survey can provide guidance, but judgment based on current conditions is important. ### Representative findings from the literature - Broad statement: Multipliers reported in surveys and studies vary widely across countries, fiscal instrument (G, T, Z), and horizons (one quarter, one year, two years, three years). - Representative entries (preserving reported magnitudes and horizons as in the source): - United States (G, DT): one quarter 0.8; one year 0.5; two years 0.5; three years 1.1; cumulative over two years 1.1 - United States (G, ST): one quarter 0.9; one year 0.6; two years 0.7; three years 0.7; cumulative over two years 1.3 - United States (T, ST): one quarter 0.7; one year 1.1; two years 1.3; three years 1.3; cumulative over two years 2.3 - Broda and Parker (2008), United States, tax rebate: within-quarter 0.2 (nondurable goods spending within first month after receipt) - Cogan and others (2009), United States (T, G): one-quarter multipliers range 1.0 to 1.0; one year 0.7 to 0.9; two years 0.5 to 0.6; three years 0.4 to 0.4; cumulative over two years 1.2 to 1.5 - Dalsgaard, André, and Richardson (2001) (annual GIMF model): reported multipliers assume no monetary accommodation (Taylor-type rule), with country-specific and global-shock results (examples include high values for Japan and global shocks) - Romer and Romer (2008), United States (T): one quarter 1.2; one year 2.8; two years 2.7; three years 4.0 - Zandi (2008), United States, tax rebate: 1.0 / 1.3 (two tax rebate multipliers from nonrefundable and refundable rebates as reported) - IMF staff aggregate and country-group results (as reported in source): - High-income, government spending (G): one quarter 0.4; one year 0.7; two years 0.9; three years 0.8; cumulative over two years 1.5 - Developing, government spending (G): one quarter 0.6; one year 0.4; two years 0.1; three years –0.11; cumulative over two years 0.5 - IMF (2008) advanced, taxes (T): 0.4 / 0.0; one year 0.6 / 0.4; government spending (G): –0.1 / 0.2; one year –0.3 / 0.5 - IMF (2008) emerging, taxes (T): 0.2 / 0.1; one year 0.2 / 0.2; government spending (G): 0.2 / 0.1; one year –0.2 / –0.2 - Notes on interpretation from the source: - “Fiscal multiplier” refers to ∆Y(t+N)/∆G(t); multipliers indicate output response at horizons relative to baseline without fiscal stimulus, interpreted as dollar increase in output at time t+N per $1 of stimulus at time t. - Where monetary policy is controlled for or accommodative, reported multipliers can differ substantially (e.g., controls for interest rates can reduce estimated multipliers by about 20 to 30 percent in some cases). *Prepared by Lone Christiansen and Martin Schindler (as presented in the source).* ### 1.8 on capital spending, and 1 for other spending. Cross-country VAR estimates of fiscal ### _spn0911 - 1.8 on capital spending, and 1 for other spending. Cross-country VAR estimates of fiscal ### Overview and rule of thumb - Cross-country VAR estimates of fiscal multipliers in LICs range from negative to 0.5. - Rule of thumb (using the definition ∆Y/∆G and assuming a constant interest rate): - Spending multipliers in large countries: 1.5 to 1 - Spending multipliers in medium sized countries: 1 to 0.5 - Spending multipliers in small open countries: 0.5 or less - Smaller multipliers (about half of the above values) are likely for revenue and transfers. - 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. ### Factors influencing multiplier size - Country-specific circumstances and the factors noted at the beginning of the text should be taken into account when choosing a multiplier for a specific country. - Degree of financial market development: - Poorly developed financial markets limit consumption and investment smoothing, which should increase multipliers. - In countries with limited access to financial markets, governments can issue debt only at very high interest rates, which decreases the size of multipliers. - In financially repressed countries, governments can issue bonds to ‘captive’ domestic savers, thereby lowering financing costs and raising multipliers. - Impact of the financial crisis (effects are uncertain and can work in opposite directions): - Increased precautionary saving (example: 2008 U.S. tax rebate appears to have been largely saved) → reduces marginal propensity to consume and lowers multipliers. - Deleveraging increases the proportion of credit constrained consumers and firms → raises multipliers. - Monetary policy extremely accommodative, short rate close to zero, commitment to keep it there → increases considerably the size of multipliers. - Institutional features: - Policies vary in efficiency and implementation timing (e.g., developing a new social safety net vs enhancing existing ones; new investment projects take longer than speeding up delivery of existing projects). - Accounting for institutional features generally requires additional, policy-specific information. ### Temporary vs permanent measures - Effect depends on the fiscal measure: - Temporary reductions in income taxes: reduce sustainability concerns but, for forward-looking consumers, have less effect on consumption. - Temporary measures that trigger intertemporal reallocation (temporary decreases in taxes on automobiles, VAT rates, investment tax credits) can be powerful, although small VAT cuts may not be “visible enough.” - Rule of thumb: permanent measures give a higher multiplier than temporary measures for interventions working through income (e.g., tax cuts); for interventions working through prices (e.g., VAT reductions, investment tax credits) temporary measures can give larger multipliers because changes in relative intertemporal prices affect consumption timing. - Note: The Elasticity of Intertemporal Substitution (EIS) can be assumed to equal 1 for nondurable goods (as stated). ### Methodologies to calculate fiscal multipliers - Four broad methodologies: - Model simulations: ISLM-like models with little forward-looking behavior tend to produce positive multipliers by construction; multipliers small or negative if fiscal sustainability is in question, agents are forward looking, or monetary policy is not accommodative. - Case studies: identify truly exogenous fiscal expansions (e.g., Romer and Romer (2008) tax policy changes); results are specific to measure and prevailing macro conditions. - Vector auto-regressions (VARs): require correct identification of exogenous movements in public expenditure or taxes; implicitly take into account monetary policy response. - Econometric studies of consumer behavior: focus on individual consumption response to income changes and provide direct, partial equilibrium effects. - Empirical challenge: simultaneity bias (a fiscal expansion in response to a negative exogenous shock can yield an observed increase in the deficit with little change in output, biasing multipliers downward). Higher frequency data and attention to implementation lags reduce simultaneity bias. ### Are multipliers reliable? Re-estimation in the present situation - The profession disagrees on reliability because of methodological differences and wide ranges of estimates, even for similar methods. - Any multiplier estimate must state the assumptions under which it is valid. - Re-estimating multipliers in the present situation is probably not advisable because the current economic situation is unique and structural parameters have changed, negating a crucial estimation assumption. - Past research summarized in the survey can provide guidance, but judgment based on current conditions is important. ### Representative findings from the literature (selected points) - Cross-country patterns and notable study results (preserving reported magnitudes and horizons as in the source): - Broad statement: Multipliers reported in surveys and studies vary widely across countries, fiscal instrument (G, T, Z), and horizons (one quarter, one year, two years, three years). - Representative entries (reported in source tables and text; illustrative, not exhaustive): - United States (G, DT): one quarter 0.8; one year 0.5; two years 0.5; three years 1.1; cumulative over two years 1.1 - United States (G, ST): one quarter 0.9; one year 0.6; two years 0.7; three years 0.7; cumulative over two years 1.3 - United States (T, ST): one quarter 0.7; one year 1.1; two years 1.3; three years 1.3; cumulative over two years 2.3 - Broda and Parker (2008), United States, tax rebate: within-quarter 0.2 (nondurable goods spending within first month after receipt) - Cogan and others (2009), United States (T, G): one-quarter multipliers range 1.0 to 1.0; one year 0.7 to 0.9; two years 0.5 to 0.6; three years 0.4 to 0.4; cumulative over two years 1.2 to 1.5 - Dalsgaard, André, and Richardson (2001) (annual GIMF model): reported multipliers assume no monetary accommodation (Taylor-type rule), with country-specific and global-shock results (examples include high values for Japan and global shocks) - Romer and Romer (2008), United States (T): one quarter 1.2; one year 2.8; two years 2.7; three years 4.0 - Zandi (2008), United States, tax rebate: 1.0 / 1.3 (two tax rebate multipliers from nonrefundable and refundable rebates as reported) - IMF staff aggregate and country-group results (as reported in source): - High-income, government spending (G): one quarter 0.4; one year 0.7; two years 0.9; three years 0.8; cumulative over two years 1.5 - Developing, government spending (G): one quarter 0.6; one year 0.4; two years 0.1; three years –0.11; cumulative over two years 0.5 - IMF (2008) advanced, taxes (T): 0.4 / 0.0 (two numbers reflecting alternative measures); one year 0.6 / 0.4; government spending (G): –0.1 / 0.2; one year –0.3 / 0.5 - IMF (2008) emerging, taxes (T): 0.2 / 0.1; one year 0.2 / 0.2; government spending (G): 0.2 / 0.1; one year –0.2 / –0.2 - Notes on interpretation from the source: - “Fiscal multiplier” refers to ∆Y(t+N)/∆G(t); multipliers indicate output response at horizons relative to baseline without fiscal stimulus, interpreted as dollar increase in output at time t+N per $1 of stimulus at time t. - Where monetary policy is controlled for or accommodative, reported multipliers can differ substantially (e.g., controls for interest rates can reduce estimated multipliers by about 20 to 30 percent in some cases). *Prepared by Lone Christiansen and Martin Schindler (as presented in the source).* ### References ### References ### Listed references - Al-Eyd, Ali J., and Ray Barrell, 2005, “Estimating Tax and Benefit Multipliers in Europe,” Economic Modelling, Vol. 22, pp. 759–76. - Blanchard, Olivier, and Roberto Perotti, 2002, “An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output,” Quarterly Journal of Economics, Vol. 117, pp. 1329–1368. - Broda, Christian, and Jonathan Parker, 2008, “The Impact of the 2008 Tax Rebate on Consumer Spending: Preliminary Evidence” (unpublished: University of Chicago Graduate School of Business). - Bryant, Ralph, Dale Henderson, Gerald Holtham, Peter Hooper, and Steven Symansky, 1988, Empirical Macroeconomics for Interdependent Economies, Supplemental Volume (Washington: Brookings Institution). - Cogan, John F., Tobias Cwik, John B. Taylor, and Volker Wieland, 2009, “New Keynesian versus Old Keynesian Government Spending Multipliers,” NBER Working Paper No. 14782 (Cambridge: NBER). - Coronado, Julia Lynn, Joseph P. Lupton, and Louise M. Sheiner, 2005, “The Household Spending Response to the 2003 Tax Cut: Evidence from Survey Data,” Federal Reserve Board Discussion Paper No. 2005-32 (Washington). - Dalsgaard, Thomas, Christophe André, and Pete Richardson, 2001, “Standard Shocks in the OECD Interlink Model,” OECD Economics Department Working Paper No. 306 (Paris: Organization for Economic Cooperation and Development). - Elmendorf, Douglas W., and Jason Furman, 2008, “If, When, How: A Primer on Fiscal Stimulus,” Hamilton Project Strategy Paper (Washington: Brookings Institution). - Freedman, Charles, Douglas Laxton, and Michael Kumhof, 2008, “Deflation and Countercyclical Fiscal Policy” (unpublished; Washington, International Monetary Fund). - Heathcote, Jonathan, 2005, “Fiscal Policy with Heterogeneous Agents and Incomplete Markets,” Review of Economic Studies, Vol. 72, pp. 161–88. - Hemming, Richard, Michael Kell, and Selma Mahfouz, 2002, “The Effectiveness of Fiscal Policy in Stimulating Economic Activity—A Review of the Literature,” IMF Working Paper No. 02/208 (Washington, International Monetary Fund). - HM Treasury, 2003, “Fiscal Stabilisation and EMU,” discussion paper (London). - Ilzetzki, Ethan, and Carlos A. Végh, 2008, “Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?” NBER Working Paper No. 14191 (Cambridge, Massachusetts: National Bureau of Economic Research). - International Monetary Fund (IMF), 2008, “Fiscal Policy as a Countercyclical Tool,” Chapter 5 in World Economic Outlook (Washington, October), pp. 159–96. - Johnson, D., Nicolas Souleles, and Jonathan Parker, 2006, “Household Expenditure and the Income Tax Rebates of 2001,” American Economic Review, Vol. 96, pp. 1589–1610. - Perotti, Roberto, 2005, “Estimating the Effects of Fiscal Policy in OECD Countries,” CEPR Discussion Paper No. 4842 (London: Centre for Economic Policy Research). - Perotti, Roberto, 2006, “Public Investment and the Golden Rule: Another (Different) Look,” IGIER Working Paper No. 277 (Milan: Bocconi University Innocenzo Gasparini Institute for Economic Research). - Ramey, Valerie, 2008, “Identifying Government Spending Shocks: It’s All in the Timing” (unpublished; University of California, San Diego). - Romer, Christina, and David Romer, 2008, “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks” (unpublished; University of California, Berkeley). - Smets, Frank, and Raf Wouters, 2007, “Shocks and Frictions in U.S. Business Cycles: A Bayesian DSGE Approach,” American Economic Review, Vol. 97, pp. 506–606. - Zandi, Mark, 2008, “A Second Quick Boost From Government Could Spark Recovery,” edited excerpts from July 24, 2008, testimony by Mark Zandi, chief economist of Moody’s Economy.com, before the U.S. House of Representatives Committee on Small Business. *Source: _spn0911 - References* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/spn/2009/_spn0911.pdf_