DP8517 Country Heterogeneity and the International Evidence on the Effects of Fiscal Policy

Author(s): Carlo A. Favero , Francesco Giavazzi , Jacopo Perego

Publication Date: August 2011

Keyword(s): fiscal policy , public debt , government budget constraint , global VAR models

JEL(s): E62 , H60

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP8517.asp.asp

This paper shows how the richer frequency and variety of fiscal policy shocks available in an international sample can be analyzed recognizing the heterogeneity that exists across different countries. The main conclusion of our empirical analysis is that the question 'what is the fiscal policy multiplier' is an ill-posed one. There is no unconditional fiscal policy multiplier. The effect of fiscal policy on output is different depending on the different debt dynamics, the different degree of openness and the different fiscal reaction functions across different countries. There are many fiscal multipliers and an average fiscal multiplier is of very little use to describe the effect of exogenous shifts in fiscal policy on output.