Fiscal policy multipliers in small states

Lichi, Alia, Shibata, Ippei and Tanyeri, Kadir (2021) Fiscal policy multipliers in small states. Economía, 21 (2). 69 - 114. ISSN 1529-7470

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Abstract

This paper estimates fiscal policy multipliers for small states using two distinct models: an empirical forecast error model with data from twenty-three small states across the world, and a dynamic stochastic general equilibrium (DSGE) model calibrated to a hypothetical small state’s economy. We find that, in the short term, multipliers for government consumption and investment in small states are both about 0.4, on average, for empirical and DSGE baseline results, and they are affected by imports as a share of GDP, the level of government debt, and the economy’s position in the business cycle, among other factors. In the medium to long run, while fiscal policy using government consumption is ineffective, government investment has a multiplier of about 0.7, on average, for empirical and DSGE baseline results. These results are robust to different model specifications and characteristics of small states. Inability to affect GDP using government consumption could be frustrating for policymakers when an expansionary policy is needed but encouraging when they consider fiscal consolidation.

Item Type:	Article
Official URL:	https://economia.lse.ac.uk/
Additional Information:	© 2021 LACTEA
Divisions:	LSE
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HJ Public Finance
JEL classification:	E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
Date Deposited:	04 Jul 2024 16:18
Last Modified:	10 Jul 2024 04:57
URI:	http://eprints.lse.ac.uk/id/eprint/123063

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