Huidrom, RajuKose, M. AyhanLim, Jamus J.Ohnsorge, Franziska L.2016-07-072016-07-072016-06https://hdl.handle.net/10986/24641This paper analyzes the relationship between fiscal multipliers and fiscal positions of governments using an Interactive Panel Vector Auto Regression model and a large data-set of advanced and developing economies. The methodology permits tracing the endogenous relationship between fiscal multipliers and fiscal positions while maintaining enough degrees of freedom to draw sharp inferences. The paper reports three major results. First, the fiscal multipliers depend on fiscal positions: the multipliers tend to be larger when fiscal positions are strong (i.e. when government debt and deficits are low) than weak. For instance, the long-run multiplier can be as large as unity when the fiscal position is strong, while it can be negative when the fiscal position is weak. Second, these effects are separate and distinct from the impact of the business cycle on the fiscal multiplier. Third, the state-dependent effects of the fiscal position on multipliers is attributable to two factors: an interest rate channel through which higher borrowing costs, due to investors' increased perception of credit risks when stimulus is implemented from a weak initial fiscal position, crowd out private investment; and a Ricardian channel through which households reduce consumption in anticipation of future fiscal adjustments.en-USCC BY 3.0 IGOFORECASTSGROWTH RATESMONETARY POLICYRISKSECONOMIC GROWTHCHECKSFISCAL BALANCESMULTIPLIERSSHORT-TERM RATELAGSMONETARY ECONOMICSINTERESTTRANSMISSION MECHANISMSEXPECTATIONSIMPORTECONOMETRIC MODELGOVERNMENT SPENDINGINTEREST RATESLACKREAL GDPOPTIONEXCHANGEMACROECONOMIC POLICYLIQUIDITYDEVELOPING COUNTRIESRECESSIONPOLITICAL ECONOMYCAPITAL STRUCTURESYIELD SPREADSFISCAL POLICYECONOMIC POLICYMACROECONOMIC CONDITIONSVARIABLESTAXBOND YIELDSWEALTHINTERNATIONAL BANKDEBT BURDENBANK LENDINGDEVELOPMENTMACROECONOMIC STABILITYEFFECTIVE EXCHANGE RATEENDOGENOUS VARIABLEINDEBTEDNESSCURRENCYDEVELOPMENT ECONOMICSFOREIGN CURRENCY DEBTADVANCED ECONOMIESSTRUCTURAL SHOCKSLOW-INCOME COUNTRIESMONEYCURRENT ACCOUNTDESCRIPTIVE STATISTICSCAPITAL FORMATIONGOVERNMENT INDEBTEDNESSEXCHANGE RATESCREDIT RISKSMONETARY FUNDFLEXIBLE EXCHANGE RATESOVEREIGN BONDMARKETSDEBTFLOATING EXCHANGE RATESPRIVATE INVESTMENTDEFICITSCONSUMPTION EXPENDITUREOPEN ECONOMYBUSINESS CYCLELENDERSRECESSIONSBORROWING COSTSGROSS DOMESTIC PRODUCTDISTORTIONSBORROWING COSTFINANCEFOREIGN CURRENCYMARKET ECONOMIESMACROECONOMIC STABILIZATIONTAXESFIXED EXCHANGE RATEEXPENDITUREDEBT LEVELSINVESTORSCONSUMPTIONGROSS FIXED CAPITAL FORMATIONGOODFISCAL SHOCKSSOVEREIGN RISKFINANCIAL CRISISFUTUREINDICATOR VARIABLEVALUETAX INCREASESCURRENT ACCOUNT BALANCECREDITMACROECONOMICSERROR TERMSDEMANDCONSUMPTION PATHSGOVERNMENT EXPENDITUREAGGREGATE DEMANDYIELD SPREADECONOMYMARKETBENCHMARKECONOMIC THEORYREAL GROSS DOMESTIC PRODUCTEXCHANGE RATE REGIMEENDOGENOUS VARIABLESPUBLIC DEBTSOLVENCYINVESTMENT RISESCREDIT RISKAVERAGE DEBTBUSINESS CYCLESGOVERNMENT DEBTTROUGHGDPINVESTORTHEORYFINANCIAL DEVELOPMENTINVESTMENTRISKOUTPUT RESPONSESBONDSHAREFISCAL BALANCEUNCERTAINTYPRIVATE CONSUMPTIONEXTERNAL DEBTFINANCIAL STRUCTUREFIXED EXCHANGE RATE REGIMESLENDINGCHECKNOMINAL INTEREST RATELEVEL OF DEBTFISCAL POSITIONSEXCHANGE RATEINSTRUMENTROBUSTNESS CHECKSREAL EFFECTIVE EXCHANGE RATELABOR MARKETSOUTCOMESCONSUMPTION INCREASESEXCHANGE RATE REGIMESFISCAL POSITIONECONOMIESDEVELOPMENT POLICYFUTURE RESEARCHWorking PaperWorld Bank10.1596/1813-9450-7724