2.2. Choice of Fiscal Instrument and Fiscal Position: Our selection of government consumption as the fiscal instrument reflects several considerations. Government consumption is a subset of the much broader measure of government spending that strips out the automatic stabilizers component, and hence represents discretionary fiscal policy. We recognize, however, that government consumption plays a modest role in large discretionary fiscal stimulus programs, such as those implemented in 2008-10, or discretionary consolidation packages. Such large packages, on the spending side, are often predominantly based on government investment and transfers (OECD 2009). Government investment could be an ideal fiscal instrument, in principle, to model large discretionary policies but, in practice, available quarterly data is insufficient to establish robust results. In addition, in our sample, government investment is relatively small, averaging only about one-quarter of government consumption. Hence, we choose government consumption as a fiscal instrument that is quantitatively large over the full sample period and available for many economies.<sup>7</sup> On the tax side, the ideal measure to represent discretionary fiscal policy would be tax rates. However, consistent measures of tax rates across countries are not readily available. Tax revenues, even though they are easily available, are highly procyclical and less suitable for our study.

Our selection of government debt as the conditioning state of fiscal position is motivated by the fact that in theoretical dynamic models that feature a fiscal sector, government debt is a state variable that enters as a lagged variable due to the flow budget constraint of the government (Galí, López-Salido, and Vallés 2007; Forni, Monteforte, and Sessa 2009; Davig and Leeper 2011). Moreover, in these models, nonlinear dynamics would depend on the initial state of government debt (and other state variables in the model). By conditioning on debt, our empirical approach attempts to match this theoretical aspect, and measures the effects of fiscal shocks conditional on the initial level of government debt.

The IPVAR model does not allow for endogenous feedback loops after the fiscal shock. Such feedback loops could be an important consideration because debt dynamics can feed into government spending, especially during times of unstable debt (Favero and Giavazzi 2007). Thus, the omission of such endogenous feedback loops could bias multipliers, even though the direction and the size of the bias is hard to pin down since multipliers are a function of both government spending and output. That said, any bias is likely to be larger over longer time horizons because debt stocks move slowly. Hence, we focus our analysis on shorter-run multipliers, i.e. multipliers up to two years. We also conduct a robustness exercise in Section 4 to analyze the impact of debt dynamics on our findings.

2.3. Identification: Given the challenges associated with identification of fiscal shocks, we consider a multi-pronged approach to identification. First, we carefully motivate our baseline identification that follows the standard Blanchard-Perotti scheme. Second, we consider an alternative identification following Auerbach and Gorodnichenko (2013) to check the robustness of our headline findings. Third, we consider alternative identifications and explain why we are unable to employ them in our exercise.

Baseline identification. Our baseline estimation relies on the standard recursive identification scheme of Blanchard and Perotti (2002). The key timing assumption in this scheme is that discretionary fiscal policy does not respond to macroeconomic conditions within the same quarter. Such a timing assumption can be motivated by implementation lags typically associated with

> 7 Government consumption is also chosen by Ilzetzki, Mendoza and Vegh (2013), Nickell and Tudyka (2014), and Corsetti et al. (2012) whereas Auerbach and Gorodnichenko (2013 and 2017) use the sum of government consumption and investment, but for a smaller sample of countries.

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