## What Determines Government Spending Multipliers?

_IMF Working Papers, June 1, 2012_

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## Bibliographic details
- Authors: Gernot Müller, Andre Meier, Giancarlo Corsetti
- Published: June 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475504217.001

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### Overview
- Research question: How do the effects of government spending vary with the economic environment?
- Sample and scope: Panel of OECD countries.
- Main approach: Identify fiscal shocks as residuals from an estimated spending rule and trace macroeconomic impact under different conditions regarding the exchange rate regime, public indebtedness, and health of the financial system.
- Unconditional result: Responses to a positive spending shock broadly confirm earlier findings.
- Conditional result highlights:
  - Real appreciation and external deficits occur mainly under currency pegs.
  - Output and consumption multipliers are unusually high during times of financial crisis.

### Methodology
- Identification: Fiscal shocks identified as residuals from an estimated spending rule.
- Comparative conditions analyzed:
  - Exchange rate regime (currency pegs versus other regimes).
  - Public indebtedness.
  - Health of the financial system (including financial crisis episodes).
- Tracing: Macroeconomic responses to identified spending shocks are traced across these different economic environments.

### Key Findings and Quantitative Points
- Conditional responses differ systematically across exchange rate regimes; under currency pegs there is notable:
  - Real appreciation.
  - External deficits (trade deficits).
- Financial crises amplify multipliers:
  - Output multiplier: unusually high during times of financial crisis.
  - Consumption multiplier: unusually high during times of financial crisis.
- Unconditional responses to a positive spending shock are broadly consistent with earlier literature.
- Subject tags and keywords (as stated): Exchange rate arrangements, Expenditure, Financial crises, Fiscal policy, Foreign exchange, Real exchange rates; and keywords including exchange rate regime, financial crisis episode, government spending multiplier, transmission mechanism, stimulus package, trade deficit, WP.

### Policy Implications and Interpretation
- Exchange rate regime matters for external adjustment following fiscal expansion: pegged regimes are associated with real appreciation and external deficits post-spending shock.
- Financial sector health conditions the size of fiscal multipliers: during financial crises fiscal stimulus may yield larger output and consumption effects.
- Implication for fiscal policy design:
  - Consider exchange rate regime when assessing external balance effects of fiscal expansion.
  - Anticipate larger demand-side effects of spending during financial crises, which may influence the timing and scale of stimulus.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/what-determines-government-spending-multipliers-25975_