Getting into the Nitty-Gritty of Fiscal Multipliers: Small Details, Big Impacts

IMF Working Papers, February 10, 2023

Source details

Canonical URL: Getting into the Nitty-Gritty of Fiscal Multipliers: Small Details, Big Impacts

The absence of a standardized framework to report fiscal multipliers limits comparisons across studies, budgetary items, or countries.
Using a unified analytical framework with a panel of 177 countries, the study analyzes how key methodological details affect the size and persistence of fiscal multipliers‘ estimates.
Baseline results are in line with existing literature:
- Average cumulative medium-term multipliers of -2.1 (-2.5) for taxes on personal income for advanced (emerging market) economies.
- Average cumulative medium-term multipliers of 0.3 (1.7) for investment for advanced (emerging market) economies.
- Average cumulative medium-term multipliers of -0.5 (1.9) for consumption for advanced (emerging market) economies.
Slight changes in the identification of shocks (for example, based on forecast errors) or in the definition of the fiscal multiplier can:
- Artificially increase the estimated size of multipliers.
- Decrease the precision of estimates.
Multipliers calculated simply as the output response to fiscal shocks, as commonly done in the literature, can potentially bias results if the endogenous dynamic responses of fiscal variables to fiscal innovations are not accounted for.

Standardization is needed to improve comparability across studies, budgetary items, and countries.
Identification of fiscal shocks matters: small changes in shock identification (including forecast-error–based approaches) materially affect multiplier estimates and their precision.
Definition of the fiscal multiplier matters: alternative definitions can produce materially different estimated sizes and persistence.
Accounting for endogenous dynamic responses of fiscal variables to fiscal innovations is important; failing to do so can bias multiplier estimates that rely solely on output responses to fiscal shocks.

Panel size: 177 countries.
Average cumulative medium-term multipliers reported:
- Taxes on personal income: -2.1 (advanced), -2.5 (emerging market).
- Investment: 0.3 (advanced), 1.7 (emerging market).
- Consumption: -0.5 (advanced), 1.9 (emerging market).
Paper length: 49 pages.
Series: Working Paper No. 2023/029.
DOI: https://doi.org/10.5089/9798400231629.001
Authors: José Federico Geli, Afonso S. Moura.
Publication date: February 10, 2023.

José Federico Geli and Afonso S. Moura; IMF Working Paper No. 2023/029; February 10, 2023.