Estimating Fiscal Multipliers Under Alternative Exchange Rate Regimes: The Case of Bolivia

IMF Working Papers, November 17, 2023

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Empirical approach: Blanchard-Perotti framework to estimate fiscal multipliers by policy instrument for Bolivia.
Modeling approach: country-specific DSGE model used to estimate multipliers and to assess interactions of fiscal and monetary policy.
Alternative assumptions considered: exchange rate regime and capital mobility, to evaluate their role in shaping fiscal adjustment impacts and the policy mix.

Expenditure multipliers:
- Fall into the range of 1/3 to 2/3.
- Public investment multipliers are slightly higher than government consumption multipliers over longer horizons.
- Multipliers are generally higher under a peg than under inflation targeting.
Tax multipliers:
- Shown to be about half of expenditure multipliers.
Interaction effects:
- The policy mix (fiscal and monetary policy) and exchange rate regime materially influence the impact of fiscal adjustments.
- The DSGE model is exploited to assess this interaction in a lower middle-income country context.

Choice of fiscal instruments matters: expenditure (especially public investment) yields larger multipliers than tax measures.
Exchange rate regime and capital mobility considerations are important when designing consolidation strategies because they affect multiplier sizes and thus the short- and medium-term output impact.
Monetary policy regime (peg versus inflation targeting) conditions the fiscal multiplier, suggesting coordination between fiscal and monetary authorities can alter consolidation outcomes.