Fiscal Multipliers During Pandemics

IMF Working Papers, July 22, 2022

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Many countries deployed substantial fiscal packages to cushion the economic fallout from the COVID-19 pandemic.
A historical look at past pandemics and epidemics highlights concomitant public sector support in response to health crises.
The paper assesses how fiscal multipliers could vary during health crises, particularly how factors such as social distancing and uncertainty could lower contemporaneous (T) multipliers and increase near-term (T+1 and T+2) multipliers as economies re-open, including due to pent-up demand.
Based on Jorda’s (2005) local projection methodology, the paper shows that cumulative fiscal multipliers one year after a health crisis is about twice larger than during normal times, particularly in advanced economies.
These results suggest that large-scale fiscal support deployed at the onset of the COVID-19 pandemic could have larger than usual lingering impacts on economic activity, which need to be accounted for when calibrating policies.

Estimation approach: Jorda’s (2005) local projection methodology.
Timing of multiplier effects emphasized:
- Contemporaneous (T) multipliers: potentially lowered by social distancing and uncertainty.
- Near-term (T+1 and T+2) multipliers: potentially increased as economies re-open and pent-up demand is realized.
Geographic and economic scope: results are particularly pronounced in advanced economies.

Calibration of fiscal policy should account for elevated near-term cumulative multipliers following health crises.
Large-scale fiscal support at the onset of pandemics may produce larger lingering impacts on economic activity than in normal times; policymakers should consider these persistent effects when designing stimulus size and timing.
Consideration of behavioral and public health factors (social distancing, uncertainty) is crucial when assessing the contemporaneous effectiveness of fiscal measures.