How Big ( Small ? ) are Fiscal Multipliers ?

We contribute to the intense debate on the real e¤ects of scal stimuli by showing that the impact of government expenditure shocks depends crucially on key country characteristics, such as the level of development, exchange rate regime, openness to trade, and public indebtedness. Based on a novel quarterly dataset of government expenditure in 44 countries, we nd that (i) the output e¤ect of an increase in government consumption is larger in industrial than in developing countries, (ii) the scal multiplier is relatively large in economies operating under predetermined exchange rate but zero in economies operating under exible exchange rates; (iii) scal multipliers in open economies are lower than in closed economies and (iv) scal multipliers in high-debt countries are also zero. We thank Giancarlo Corsetti, James Feyrer, Guy Michaels, Phillip Lane, Roberto Perotti, Carmen Reinhart, Vincent Reinhart, Luis Serven, Todd Walker, Tomasz Wieladek and participants at several conferences and seminars for their useful comments. We thank numerous o¢cials at nance ministries, central banks, national statistical agencies, and the IMF for their assistance in compiling the dataset. Giagkos Alexopoulos and Daniel Osorio-Rodriguez provided excellent research assistance. As scal stimulus packages were hastily put together around the world in early 2009, one could not have been blamed for thinking that there must be some broad agreement in the profession regarding the size of the scal multipliers. Far from it. In a January 2009Wall Street Journal op-ed piece, Robert Barro argued that peacetime scal multipliers were essentially zero. At the other extreme, Christina Romer, Chair of President Obamas Council of Economic Advisers at the time, used multipliers as high as 1.6 in estimating the job gains that would be generated by the $787 billion stimulus package approved by Congress in February 2009. The di¤erence between Romers and Barros views of the world amounts to a staggering 3.7 million jobs by the end of 2010. If anything, the uncertainty regarding the size of scal multipliers in developing and emerging markets is even greater. Data are more scarce and often of dubious quality. A history of scal proigacy and spotty debt repayments calls into question the sustainability of any scal expansion. How does nancial fragility a¤ect the size of scal multipliers? Does the exchange regime matter? What about the degree of openness? There is currently little empirical evidence to shed light on these critical policy questions. In this paper we aim to ll this gap by conducting a detailed empirical analysis that establishes the relevance of key country characteristics in predicting whether scal stimulus is e¤ective or ine¤ective. A big hurdle in obtaining precise estimates of scal multipliers has been data availability. Most studies have relied on annual data, which makes it di¢cult to obtain precise estimates. To address this shortcoming, we have put together a novel quarterly dataset for 44 countries (20 high-income and 24 developing). The coverage, which varies across countries, spans from as early as 1960:1 to as late as 2007:4. We have gone to great lengths to ensure that only data originally collected on a quarterly basis is included (as opposed to interpolated based on annual data). Using this unique database  and sorting out countries based on various key characteristics  we have estimated scal multipliers for di¤erent groups of countries in our sample. The papers main results are summarized as follows: 1. In developing countries, the response of output to increases in government consumption is negative on impact. It is smaller by a statistically signi cant margin from both zero and the response estimated for high-income countries. In developing countries, output increases in response to a shock in government consumption only with a lag (of 2 to 4 quarters) and the cumulative response of output is not statistically di¤erent