Estimating Fiscal Multipliers with Correlated Heterogeneity

February 4, 2016

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Emmanouil Kitsios, and Manasa Patnam. Estimating Fiscal Multipliers with Correlated Heterogeneity, (USA: International Monetary Fund, 2016) accessed September 27, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We estimate the average fiscal multiplier, allowing multipliers to be heterogeneous across countries or over time and correlated with the size of government spending. We demonstrate that this form of nonseparable unobserved heterogeneity is empirically relevant and address it by estimating a correlated random coefficient model. Using a panel dataset of 127 countries over the period 1994-2011, we show that not accounting for omitted heterogeneity produces a significant downward bias in conventional multiplier estimates. We rely on both crosssectional and time-series variation in spending shocks, exploiting the differential effects of oil price shocks on fuel subsidies, to identify the average government spending multiplier. Our estimates of the average multiplier range between 1.4 and 1.6.

Subject: Energy subsidies, Expenditure, Fiscal multipliers, Fiscal policy, Fuel prices, Oil prices, Prices

Keywords: Brent price, Energy subsidies, Fiscal Multipliers, Fuel prices, Global, Government spending, Government spending multiplier, Least squares, Multiplier estimate, Nonseparable Unobserved Heterogeneity, Oil Price, Oil price shock, Oil prices, Standard error, Subsidy regime, WP

Publication Details

Pages:

51
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/013
Stock No:

WPIEA2016013
ISBN:

9781498389808
ISSN:

1018-5941

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