“What Do We Know about Fiscal Multipliers?” in: Rethinking Fiscal Policy after the Crisis. Cambridge University Press, 2017. doi P. 443-482. doi
Authors: Favero C., Karamysheva M.
The Empirical evidence on fiscal multipliers is very heterogeneous. In this paper, we first survey available estimates of fiscal multipliers to try to understand their heterogeneity. We provide a general framework that allows to make the identification and specification choices made by the different authors explicit and leads hopefully to a better understanding of the heterogeneity of results.
"Can Uncertainty Explain the Heterogeneous Output Effects of Fiscal Adjustments?"
Authors: Karamysheva M.
Recent empirical evidence suggests that fiscal consolidations mainly based on tax hikes have a more recessionary impact on economic growth relative to those based on expenditure cuts. This paper evaluates the output effects of fiscal adjustment plans identified through the narrative approach. I incorporate fiscal plans into a vector autoregression model to investigate the channels of transmission of fiscal consolidations. In addition to a direct effect, I explore two indirect effects, in particular, whether monetary policy or uncertainty could explain the heterogeneous output effects of fiscal adjustment plans. It appears that uncertainty channel is more important among the two.
"The Network Effects of Fiscal Adjustments."
Authors: Briganti E., Favero C., Karamysheva M.
A large and increasing body of empirical evidence has established that fiscal adjustments based on government spending cuts are less costly in terms of losses in output growth than those based on tax increases. We show that the heterogeneous effects of tax-based and expenditure-based adjustments can be explained by the difference in their propagation channels in the network of industries. In theory, a tax-based adjustment plan is mainly a supply-side shock which propagates downstream (from supplier industries to customer industries) while an expenditure-based plan is a demand-side shock which propagates upstream (from customer industries to supplier industries). In practice, the empirical investigation of these channels on US data based on Spatial Vector Autoregressions reveals that tax-based plans propagate through the network with an average output multiplier of close to -2, while the propagation of expenditure-based plans does not lead to any statistically significant contractionary effect on growth.
"Prudential policies and systemic risk: the role of interconnections."
Authors: Karamysheva M., Seregina E.
The impact of prudential policies in open economies depends not only on their intrinsic efficacy but also on the feedback of the policy through close trade and financial partners. Using a sample of advanced countries, we find that prudential policy measures reduce systemic risk in the financial system in 2000-2014. We show that the indirect effect in case of uniform interventions enforces the direct one and accounts for up to 70% of total risk reduction manifesting the importance of policy coordination. The interventions though remain insignificant for GIIPS countries which remain dependent on actions of their financial counterparties.
"Government spending multiplier and the size of the shock. Evidence from the U.S."
Authors: German N., Karamysheva M.
This paper investigates whether fiscal multiplier depends negatively on the size of the government spending shock. We build our hypothesis on behavioral arguments and check it empirically on US data. For doing so, we adopt state-dependent VAR, accompanied by Jordá local projections method, and show that investigated relationship is U-shaped: for small shocks in government consumption and investment, the fiscal multiplier is rising in size of the shock, while for large ones it falls. We address possible endogeneity issues and illustrate that our results are non-sensible to these concerns. Finally, we limit our analysis to government consumption multiplier, as our hypothesis suggests strong non-constancy namely in this position. We find a strong negative relationship between government consumption multiplier and the size of the shock.
"The Measurement of the Output Effect of Fiscal Adjustment"
Authors: Favero C., Karamysheva M.
Fiscal policy is conducted through rare decisions and it is implemented through multi-year plans. When fiscal policy is conducted in country i through multi-year plans, narrative exogenous fiscal adjustments in each year are made of three components: the unexpected adjustments (announced upon implementation at time t), the past announced adjustments (implemented at time t but announced in the previous years) and the future announced corrections. This involves an intertemporal dimension (to capture anticipated vs. unanticipated components) and an intratemporal one (to cover both expenditure and revenue side). We argue that the analysis of the dynamic impact of fiscal policy shocks neglects the fact that fiscal policy is conducted throughout multi-year plans. And by ignoring the intertemporal dimension, one disregards the fact that agents are aware of future, but not yet realized fiscal adjustments. While by ignoring the intratemporal dimension one fails to capture the composition of the plan. The paper addresses the important question of the plans’ simulation from the econometric perspective. We propose an econometric specification, which extends the simple truncated MA representation and takes into account the intertemporal and the intratemporal correlations.