No. 1293 - Fiscal space and the size of fiscal multiplier

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by Luca Metelli and Kevin Pallara (Losanna University)September 2020

The paper studies empirically whether the effects of public spending in the United States differ as the conditions of its public finances vary, measured using the concept of fiscal space. Four different fiscal space indicators are constructed to obtain a breakdown between periods of greater and lesser sustainability for the public finances. Finally, the effects of shocks to government spending in these periods are estimated.

The effects of government spending are greater when an expansionary manoeuvre is implemented at times when fiscal space is ample. In this case, the fiscal multiplier is greater than one. As public finance conditions worsen, the effects are significantly smaller and the multiplier is less than one.

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