How Fiscal Space Matters? Evidence on Fiscal Multipliers from Threshold SVAR Methodology

Abstract

In this paper, we alternatively apply a threshold SVAR methodology to measure fiscal multipliers in selected world’s economies with regard to the size of the fiscal space defined by a proxy variable of primary balance, which may be substantially linked to the ability of the fiscal policy instruments to affect the output. Results suggest that positive and negative shocks do not necessarily result in symmetric response of variables as smaller fiscal multipliers (i.e., less effective fiscal policies) are observed when economies show weaker fiscal position. Thus, expansionary fiscal policy in times of narrow fiscal space dampens expansionary effects on real economic activity. At the same time, we find considerably lower revenue than spending multipliers, confirming Keynesian theory (except for France).