Estimating Fiscal Multipliers: News from a Nonlinear World

Melbourne Institute Working Paper No. 26/14

Date: 2014

Author(s):

Giovanni Caggiano
Efrem Castelnuovo
Valentina Colombo
Gabriela Nodari

Abstract

We estimate nonlinear VARs to assess to what extent fiscal spending multipliers are countercyclical in the United States. We deal with the issue of non-fundamentalness due to fiscal foresight by appealing to sums of revisions of expectations of fiscal expenditures. This measure of anticipated fiscal shocks is shown to carry valuable information about future dynamics of public spending. Results based on generalized impulse responses suggest that fiscal spending multipliers in recessions are greater than one, but not statistically larger than those in expansions. However, nonlinearities arise when focusing on “extreme” events, i.e. deep recessions vs. strong expansionary periods.