Fiscal Policy Multipliers in Small States

By Ali Alichi, Ippei Shibata, Kadir Tanyeri

March 26, 2019

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Format: Chicago

Ali Alichi, Ippei Shibata, and Kadir Tanyeri. Fiscal Policy Multipliers in Small States, (USA: International Monetary Fund, 2019) accessed November 8, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Government debt in many small states has risen beyond sustainable levels and some governments are considering fiscal consolidation. This paper estimates fiscal policy multipliers for small states using two distinct models: an empirical forecast error model with data from 23 small states across the world; and a Dynamic Stochastic General Equilibrium (DSGE) model calibrated to a hypothetical small state’s economy. The results suggest that fiscal policy using government current primary spending is ineffective, but using government investment is very potent in small states in affecting the level of their GDP over the medium term. These results are robust to different model specifications and characteristics of small states. Inability to affect GDP using current primary spending could be frustrating for policymakers when an expansionary policy is needed, but encouraging at the current juncture when many governments are considering fiscal consolidation. For the short term, however, multipliers for government current primary spending are larger and affected by imports as share of GDP, level of government debt, and position of the economy in the business cycle, among other factors.

Subject: Current spending, Expenditure, Fiscal multipliers, Fiscal policy, Government consumption, National accounts, Public debt, Public investment spending

Keywords: Caribbean, Cost of fiscal consolidation, Current spending, Effect of a consolidation, Fiscal multiplier, Fiscal Multipliers, Fiscal Policy, GDP cost, GDP effect, GDP impact, GDP path, GDP statistics, Global, Government consumption, Government investment multiplier, Government Spending, Impacts of government consumption, Public investment spending, Real GDP, Trend GDP, World GDP, WP

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/072
Stock No:

WPIEA2019072
ISBN:

9781498303996
ISSN:

1018-5941

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