The Return of Expansionary Austerity: Firms’ Investment Response to Fiscal Adjustments in Emerging Markets

April 8, 2022

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Format: Chicago

Nicolas E Magud, and Samuel Pienknagura. The Return of Expansionary Austerity: Firms’ Investment Response to Fiscal Adjustments in Emerging Markets, (USA: International Monetary Fund, 2022) 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

We study the response of corporate investment in Emerging Markets to unexpected fiscal shocks. We find that, although firm-level investment decreases on impact following unexpected public expenditure adjustments (classical Keynesian multiplier effect), it quickly rises above pre-shock levels. The rebound in investment is facilitated by fiscal space, flexible exchange rates, and more predictable fiscal policy. We also show that the composition of fiscal adjustments matters for investment’s response—compared to public investment adjustments, reductions in public consumption lead to larger private investment contractions on impact, but drive private investment to above pre-shock levels. Finally, we exploit firm-level heterogeneity in several dimensions, including to show that corporate investment’s recovery is stronger in firms in the tradable sector and in larger and less indebted firms, and to show that the long-run benefits to economic activity of the fiscal shock appear to outweigh its short-run costs.

Subject: Capital adequacy requirements, Corporate investment, Expenditure, Financial regulation and supervision, Fiscal consolidation, Fiscal policy, National accounts, Public debt

Keywords: Adjustment, Africa, Asia and Pacific, Capital adequacy requirements, Corporate investment, Corporate investment, Emerging markets, Europe, Firm level, Firms' investment response, Fiscal consolidation, Fiscal shocks, Global, Government expenditure Forecast Error, Middle East and Central Asia, Rebound in investment, Sales growth

Publication Details

Pages:

55
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/070
Stock No:

WPIEA2022070
ISBN:

9798400204845
ISSN:

1018-5941

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