ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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On the Dynamics of Time-varying Fiscal Multipliers

The dynamic transmission and the effectiveness of the Indian public expenditure shock are analysed. The article uses a time-varying parameter vector autoregressive model with stochastic volatility to compute the time-varying Indian public expenditure multiplier and employ Bayesian regression consequently to examine its determinants.

 

Over the years, fiscal management has reignited the debate on the role of fiscal policy during turbulent periods. Conventionally, fiscal policy has been identified as an appropriate tool to smoothen the macro­economic volatility during turbulent times. The post-2008 global financial crisis (GFC) started the debate on the effectiveness of fiscal policy—whether it is procyclical or countercyclical. The recent COVID-19 pandemic also received a similar attention as the pandemic forced larger fiscal support to mitigate the slowdown in economic activities as well as provide social security benefits. In the fiscal policy domain, the effectiveness of fiscal policy is measured through fiscal multipliers and has been one of the central areas of research in macroeconomics, especially when the macro–fiscal balance issue is discussed.

A large strand of literature has documented fiscal multipliers as countercyclical, that is, higher during economic downturns as compared to during the expansions. Indeed, the literature suggests that the size of fiscal multipliers is not linear but is rather non-linear (Tagkalakis 2008; Auerbach et al 2011; Auerbach et al 2012; Crichton 2015; Berge et al 2021). Such non-linear characteristics of the business cycle have added a burgeoning dimension to the fiscal multiplier literature. The non-linear setting allows for calculating and analysing the fiscal multiplier during recession and expansion periods. In this regard, Auerbach and Gorodnichenko (2012) used the non-linear set-up and applied the smooth transition vector autoregressive (STVAR) framework to compute the fiscal multipliers during different business-cycle phases of the United States (US) eco­nomy, especially to understand the impact of fiscal stimulus during the post-2008 period.

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Updated On : 6th Nov, 2022
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