Fiscal multipliers are important tools for macroeconomic projections and policy design. In many countries, little is known about the size of multipliers, as data availability limits the scope for empirical research. For these countries, we propose a simple method—dubbed the “bucket approach”—to come up with reasonable multiplier estimates. The approach bunches countries into groups (or “buckets”) with similar multiplier values, based on their characteristics. It also takes into account the effect of some temporary factors, such as the state of the business cycle.

We estimate the average fiscal multiplier, allowing multipliers to be heterogeneous across countries or over time and correlated with the size of government spending. We demonstrate that this form of nonseparable unobserved heterogeneity is empirically relevant and address it by estimating a correlated random coefficient model. Using a panel dataset of 127 countries over the period 1994-2011, we show that not accounting for omitted heterogeneity produces a significant downward bias in conventional multiplier estimates. We rely on both crosssectional and time-series variation in spending shocks, exploiting the differential effects of oil price shocks on fuel subsidies, to identify the average government spending multiplier. Our estimates of the average multiplier range between 1.4 and 1.6.

Only a few empirical studies have analyzed the relationship between fiscal multipliers and the underlying state of the economy. This paper investigates this link on a country-by-country basis for the G7 economies (excluding Italy). Our results show that fiscal multipliers differ across countries, calling for a tailored use of fiscal policy. Moreover, the position in the business cycle affects the impact of fiscal policy on output: on average, government spending, and revenue multipliers tend to be larger in downturns than in expansions. This asymmetry has implications for the choice between an upfront fiscal adjustment versus a more gradual approach.

The recent recession has brought fiscal policy back to the forefront, with economists and policy makers struggling to reach a consensus on highly political issues like tax rates and government spending. At the heart of the debate are fiscal multipliers, whose size and sensitivity determine the power of such policies to influence economic growth. Fiscal Policy after the Financial Crisis focuses on the effects of fiscal stimuli and increased government spending, with contributions that consider the measurement of the multiplier effect and its size. In the face of uncertainty over the sustainability of recent economic policies, further contributions to this volume discuss the merits of alternate means of debt reduction through decreased government spending or increased taxes. A final section examines how the short-term political forces driving fiscal policy might be balanced with aspects of the long-term planning governing monetary policy. A direct intervention in timely debates, Fiscal Policy after the Financial Crisis offers invaluable insights about various responses to the recent financial crisis.

Despite the remarkable progress the literature has made throughout the past years in studying fiscal multipliers, estimates still vary considerably across studies. Partly, estimates differ because of context-specific variables that affect multipliers, but also because of the lack of a standardized framework to calculate and report them, making comparisons among studies hard to make. In this paper, we use a large panel of countries to study how some important methodological details affect the empirical estimates. Focusing on emerging economies, we show how slight changes in the filtering approach of fiscal forecast errors or the accumulation procedure of responses can significantly impact estimates. We emphasize that one of the most important features of estimating multipliers is the endogenous dynamic responses of fiscal variables to fiscal shocks, and therefore we argue against reporting multipliers as simply the output response to exogenous fiscal innovations. Although our baseline results are in line with the previous studies, our standardized framework allow us to make fairer comparisons of multiplier estimates across budgetary items and country income groups.

The multipliers of taxes, and government consumption and investment expenditure for the Eastern Caribbean Currency Union (ECCU) are estimated using vector autoregression models with panel data. The impact and long-run multipliers are below unity, suggesting that a great extent of the intended impulse ends up expanding imported demand. The long-run multipliers of taxes and consumption expenditure are non-different from zero statistically, while public investment has a long-run multiplier of 0.6. The results suggest that countercyclical policies to stimulate growth should focus on public investment.