DO PUBLIC AND PRIVATE DEBT LEVELS AFFECT THE SIZE OF FISCAL MULTIPLIERS?

https://doi.org/10.22146/jieb.23172

Chairul Adi(1*)

(1) Ministry of Finance, Republic of Indonesia, Indonesia
(*) Corresponding Author

Abstract


This paper investigates the effectiveness of fiscal policies – as measured by the impact and cumulative multipliers – and how they interact with public and private debt. Harnessing the moderated panel regression approach, based on the yearly data set of several economies during the period from 1996 to 2012, the analysis is focused on the impact of spending-and-revenue-based fiscal policies on economic growth and how these fiscal instruments interact with public and private indebtedness. The result of spending stimuli advocates the basic Keynesian theory. An increase in public expenditures contemporaneously generates a positive multiplier, of around 0.29 – 0.44 and around 0.45 – 0.58 during two years. Decomposing the expenditures into their elements, this paper documents a stronger impact from public investment than that from government purchases. On the other hand, the revenue stimuli seem to follow the Ricardian Equivalence Hypothesis (REH), arguing that current tax cuts are inconsequential. The impact and cumulative multipliers for this fiscal instrument have mixed results, ranging from -0.21 to 0.05 and -0.26 to 0.06, respectively. Moreover, no robust evidence is found to support the argument that government debt moderates the effectiveness of fiscal policies. The size of the multipliers for both spending and revenue policies remain constant with the level of public debt. On the other hand, private debt appears to show a statistically significant moderating effect on spending stimuli. Its impact on spending multipliers, however, is economically insignificant. The moderation effect of private debt on the revenue stimuli does not seem to exist. Finally, this paper documents that both public and private debt exhibit a negative and statistically significant estimation for economic output.


Keywords


fiscal policy; impact multiplier; cumulative multiplier; public debt; private debt

Full Text:

PDF


References

Adam, K., 2010. “Government Debt and Optimal Monetary and Fiscal Policy.” Manheim University and Centre for Economic and Policy Research.

Afonso, A., H.P. Gruner, and C. Kolerus. 2010. “Fiscal Policy and Growth Do Financial Crises Make a Difference.” European Central Bank Working Paper Series, (1217).

Alesina, A.F., and S. Ardagna., 2009. “Large Changes in Fiscal Policy: Taxes Versus Spending.” National Bureau of Economic Research: Working Paper, 15438.

Almunia, M., A. Benetrix, B. Eichengreen, K.H. O'Rourke, and G. Rua. 2010. “Lessons from the Great Depression.” Economic Policy (April).

Andres, J., J.E. Bosca, and J. Ferri. 2014. “Instruments, Rules, and Household Debt: The Effects of Fiscal Policy.” University of Valencia.

Baltagi, B.H., 2005. Econometric Analysis of Panel Data. 3rd. West Sussex: John Wiley & Sons, Ltd.

Barsky, R.B., N.G. Mankiw, and S.P. Zeldes. 1986. “Ricardian Consumers with Keynesian Propensities.” The American Economic Review, 76 (4).

Batini, N., G. Callegari, and G. Melina. 2012. “Successful Austerity in the United States, Europe, and Japan.” International Monetary Fund Working Paper.

Batini,  N., L. Eyraud, L. Forni, and A. Weber. 2014. “Fiscal Multipliers: Size, Determinants, and Use in Macroeco­nomic Projections.” International Monetary Fund: Technical Notes and Manuals.

Baum, A., M. Poplawski-Ribeiro, and A. Weber. 2012. “Fiscal Multipliers and the State of the Economy.” International Monetary Fund Working Paper.

Berben, R.P., and T. Brosens. 2005, “The Impact of Government Debt on Private Consumption in OECD Countries.” De Nederlansche Bank Working Paper, (45).

Blanchard, O., and R. Perotti. 2002. “An Empirical characterization of the dynamic effects of changes in Government spending and taxes on output.” The Quarterly Journal of Economics.

Case, K.E., R.C. Fair, and S.M. Oster., 2012. Principles of Macroeconomics. 10th. Boston: Pearson Education, Inc.

Cecchetti, S.G., M.S. Mohanty, and F. Zampolli. 2011. “The Real Effects of Debt.” Bank for International Settlements Working Papers, (352).

Checherita, C., and P. Rother., 2010. “The Impact of high and growing government debt on economic growth: An empirical investigation for the Euro area.” European Central Bank Working Paper Series, 1237.

Coenen, G., Christopher J.E., C. Freedman, D. Furceri, M. Kumhof, R. Lalonde, D. Laxton, J. Lindé, A. Mourougane, D. Muir, S. Mursula, C. de Resende, J. Roberts, W. Roeger, S. Snudden, M. Trabandt, and Jan in ‘t Veld., 2012. “Effects of Fiscal Stimulus in Structural Models.” American Economic Journal: Macroecono­mics, 4 (1), 22-68.

Cogan, J.F., Tobias C., J.B. Taylor, and V. Wieland., 2009. “New Keynesian Versus Old Keynesian Government Spending Multipliers.” National Bureau of Economic Research: Working Paper, 14782.

Corsetti, G., A. Meier, and G.J. Muller., 2012. “What Determines Govern­ment Spending Multipliers.” International Monetary Fund Working Paper.

Corsetti, G., K. Kuester, A. Meier, and G.J. Muller., 2012. “Sovereign Risk, Fiscal Policy, and Macroeconomic Stability.” International Monetary Fund Working Paper.

Curutchet, A.S., 2006. “Essays on Fiscal Policy, Public Debt, and Financial Development.” Lund Economic Studies, 136.

Fatas, A., and I. Mihov., 2001. “The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence.” INSEAD and Centre for Economic and Policy Research.

Favero, C., and F. Giavazzi., 2007. “Debt and the Effects of Fiscal Policy.” Federal Reserve Bank of Boston Working Papers, 07-4.

Forni, L., L. Monteforte, and L. Sessa., 2009. “The General Equilibrium Effects of Fiscal Policy: Estimates for the Euro Area.” Journal of Public Economics, 93, 559-585.

Gonzalez-Garcia, J., A. Lemus, and M. Mrkaic., 2013. “Fiscal Multipliers in the ECCU.” International Monetary Fund Working Paper.

Herndon, T., M. Ash, and R. Pollin., 2013. “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff.” Political Economy Research Institute: Working Paper Series, 322.

Hsiao, C., 2007. “Panel Data Analysis - Advantages and Challenges.” TEST, 16 (1), 1.

Ilzetzki, E., and C.A. Vegh., 2008. “Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?” National Bureau of Economic Research: Working Paper, 14191.

Ilzetzki, E., E.G. Mendoza, and C.A. Vegh., 2013. “How Big (Small?) are Fiscal Multipliers?” Journal of Monetary Economics, 239-254.

International Monetary Fund., 2008. “Chapter 5: Fiscal Policy as a Countercyclical Tool.” In World Economic Outlook. Washington.

Jain, R., and P. Kumar., 2013. “Size of Government Expenditure Multipliers in India: A Structural VAR Analysis.” Reserve Bank of India Working Paper Series, 07.

Kumar, M.S., and J. Woo., 2010. “Public Debt and Growth.” International Monetary Fund Working Paper.

Leibfritz, W., D. Roseveare, and Paul van den Noord., 1994. “Fiscal Policy, Government Debt, and Economic Perfor­mance.” OECD Economics Department Working Papers, 144.

Mankiw, N.G., 2008. Principles of Macroeconomics. 5th. Mason, Ohio: South-Western Cengage Learning.

Minea, A., and A. Parent., 2012. “Is High Public Debt Always Harmful to Economic Growth? Reinhart and Rogoff Some Complex Nonlinearities.” CERDI University of Augverne.

Motley, B.. 1987. “Ricardo or Keynes: Does the Government Debt Affect Consumption?” Federal Reserve Bank of San Francisco Economic Review, 1.

Mountford, A., and H. Uhlig., 2008. “What are the Effects of Fiscal Policy Shocks?” National Bureau of Economic Research: Working Paper, 14551.

Nakamura, E., and J. Steinsson., 2011. “Fiscal Stimulus in a Monetary Union: Evidence from US Regions.” National Bureau of Economic Research: Working Paper, 17391.

Perotti, R., 2004. “Estimating the Effects of Fiscal Policy in OECD Countries.” Universita Bocconi and Centre for Economic Policy Research.

Qazizada, W., and E. Stockhammer., 2015. “Government Spending Multiplier in Contraction and Expansion.” International Review of Applied Economics, 29 (2), 238-258.

Reinhart, C.M., and K.S. Rogoff., 2010. “Growth in a Time of Debt.” National Bureau of Economic Research: Working Paper 15639.

Reinhart, C.M., V.R. Reinhart, and K.S. Rogoff., 2012. “Public Debt Overhangs: Advanced Economy Episodes Since 1800.” Journal of Economic Perspectives, 26 (3), 69-86.

Schularick, M.H.P., and A.M. Taylor., 2013. “Sovereigns Versus Banks: Credit, Crises, and Consequences.” National Bureau of Economic Research: Working Paper, 19506.

Sharma, S., R.M. Durand, and O. Gur-Arie., 1981. “Identification and Analysis of Moderator Variables.” Journal of Marketing Research, 18 (3), 291-300.

Spilimbergo, A., S. Symansky, and M. Schindler., 2009. “Fiscal Multi­pliers.” International Monetary Fund: Staff Position Note.



DOI: https://doi.org/10.22146/jieb.23172

Article Metrics

Abstract views : 1223 | views : 1189

Refbacks

  • There are currently no refbacks.




Copyright (c) 2017 Journal of Indonesian Economy and Business

Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Journal of Indonesian Economy and Business

Journal

Editorial Team
Focus and Scope
Peer Review Process
Publication Ethics
Screening for Plagiarism

Authors

Author Guidelines
Submission Guidelines
Online Submissions
Copyright Notice
Privacy Statement
Author Fees

Download

Author Pack
Submission Form & Manuscript Template

 

Reviewer

Reviewer Guidelines
Reviewer Acknowledgement

 

Reader

General Search
Achieves
Author index
Title index

 

 

The Journal of Indonesian Economy and Business (print ISSN 2085-8272; online ISSN 2338-5847) is published by the Faculty of Economics and Business Universitas Gadjah Mada, Indonesia. The content of this website is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License

© 2019 Journal of Indonesian Economy and Business 
 Visitor Statistics