Fiscal Policy Effectiveness in a Small Open Economy: Estimates of Tax and Spending Multipliers in Paraguay

IMF Working Papers, March 22, 2017

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The paper presents estimates of fiscal multipliers in Paraguay using different econometric techniques and identification approaches.
Multipliers for capital expenditure are substantially higher than multipliers for current expenditure.
Tax multipliers are close to zero when using conventional identification approaches.
Tax multiplier estimates can be much larger when using the “narrative” approach.
The balanced budget multiplier for Paraguay — the effect on output of an increase in expenditures (in particular capital expenditure) financed by taxes — is likely to be positive.

Multiple econometric techniques and identification approaches are employed (including conventional identification and the “narrative” approach).
The paper uses approaches that distinguish between capital expenditure and current expenditure in estimating expenditure multipliers.
The “narrative” approach yields larger estimated tax multipliers compared with conventional identification approaches.

Prioritizing capital expenditure may yield larger output effects per unit of spending than current expenditure, based on estimated multipliers.
Financing increased capital expenditure with tax measures is likely to yield a positive balanced budget multiplier in Paraguay.
Careful identification of fiscal shocks (conventional vs. narrative) matters for the estimated effectiveness of tax measures.

IMF Working Paper — Fiscal Policy Effectiveness in a Small Open Economy: Estimates of Tax and Spending Multipliers in Paraguay

wp1763 - Annex A). Estevao & Samake
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