Other possible identification approaches. For example, Favero and Giavazzi (2010) note that impact estimates of fiscal policy are larger when fiscal shocks are identified in a narrative approach than when they are identified in a VAR framework. Romer and Romer (2010) use a narrative approach to identify exogenous fiscal shocks for the United States. For a broader set of countries, Guajardo, Leigh, and Pescatori (2014) and Gupta et al. (2017) have compiled data for fiscal consolidation episodes. However, we would not necessarily expect the interest rate channel, especially, to operate during a fiscal consolidation if investors remain cautiously risk averse during consolidations, whereas their risk aversion may lead them to respond sharply to fiscal stimulus. Hence, a dataset of fiscal consolidations is less useful for our purposes.

2.4 Database: Our main database comprises an unbalanced panel that covers 34 countries (19 advanced and 15 developing), at the quarterly frequency over the period 1980:1 to 2014:1. Real government consumption and real GDP are based on the quarterly database in Ilzetzki, Mendoza, and Vegh (2013) which are extended to 2014:1 by splicing data from the OECD and Haver Analytics. Real effective exchange rates are from the narrow (wherever available) and broad indices of the BIS, and current account balances are from Haver Analytics. The short-term rate used for discounting the multiplier is drawn mainly from the IMF-IFS database. We obtain quarterly real private consumption and private investment series from the OECD, Haver Analytics, and Eurostat. CDS spreads are in basis points and taken from Kose et al. (2017). We draw the conditioning variable (government debt as percentage of GDP) from the IMF-WEO database.<sup>9</sup> The government consumption, private consumption and GDP series are converted into logarithmic form, and detrended using a linear quadratic trend. The exchange rate is transformed into quarter-on-quarter growth rates, and the current account series is seasonally-adjusted using the X11 routine. All these series are detrended and demeaned on a country-by-country basis, which effectively controls for country fixed effects in the regressions.

# 3. Results

This section presents the results of our empirical exercise. We first document our evidence for the presence of the Ricardian and interest rate channels. We also discuss the implications of these channels for fiscal multipliers that are contingent on the initial fiscal position.

3.1 Fiscal Position-Dependent Multipliers: We first briefly present the set of estimated fiscal multipliers that depend on government debt—our measure of the fiscal position.<sup>10</sup> Figure 1 shows that there is a systematic link between the size of the multiplier and the fiscal position: the median value of the multiplier decreases monotonically in debt, for all horizons reported. That is, the estimated multipliers for all the horizons are positive and significant for low levels of debt, but turn negative or insignificant when debt levels are high. For instance, the two-year multiplier is about 0.6 when debt is low (10<sup>th</sup> percentile in the sample, i.e. a “strong” fiscal position) and nearzero when debt is high (90<sup>th</sup> percentile in the sample, i.e. “weak” fiscal position). The difference in the estimated multipliers for low and high levels of debt remains significant at longer horizons. Our empirical results therefore lend support to the theoretical insights of earlier studies which show that a weak fiscal position can result in stronger crowding-out effects, blunting the

> 9 Details on the sample are provided in Table 1. The sources and definitions of our data are provided in the Supplementary Appendix (Table A.1).

> 10 We also examine the unconditional multipliers using a standard panel SVAR. We provide details of these results in the Supplementary Appendix Figure A.1 and A.2. The estimates suggest that unconditional multipliers are, on average, insignificantly different from zero.

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