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Fiscal Stimulus in Times of High Debt: Reconsidering Multipliers and Twin Deficits
Ist Teil von
Journal of money, credit and banking, 2014-10, Vol.46 (7), p.1313-1344
Ort / Verlag
Columbus: Blackwell Publishing Ltd
Erscheinungsjahr
2014
Link zum Volltext
Quelle
EBSCOhost Business Source Ultimate
Beschreibungen/Notizen
We investigate the impact of fiscal stimuli at different levels of the government debt-to-GDP ratio for a sample of 17 European countries from 1970 to 2010. This is implemented in an interacted panel VAR framework in which all coefficient parameters are allowed to change continuously with the debt-to-GDP ratio. We find that responses to government spending shocks exhibit strong nonlinear behavior. While the overall cumulative effect of a spending shock on real GDP is positive and significant at moderate debt-to-GDP ratios, this effect turns negative as the ratio increases. The total cumulative effect on the trade balance as a share of GDP is negative at first but switches sign at higher levels of debt. Consequently, depending on the degree of public indebtedness, our results accommodate long-run fiscal multipliers that are greater and smaller than one or even negative as well as twin deficit and twin divergence behavior within one sample and time period. From a policy perspective, these results lend additional support to increased prudence at high public debt ratios because the effectiveness of fiscal stimuli to boost economic activity or resolve external imbalances may not be guaranteed.