Cross-country Evidence on Determinants of Fiscal Policy Effectiveness:
The Role of Capital Flows and a Country’s International Trade and Financial Position
This paper studies the determinants of size differentials between fiscal multipliers in countries around the world, both advanced and developing economies. Besides domestic conditions and exchange rate regimes, we also introduce variables not before considered for explaining multiplier size differentials such as capital flows and the openness of capital markets. We also disaggregate GDP into its main components in order to identify the channels through which external and internal factors can influence GDP after a change in fiscal policy. Our results point to the existence of a new channel through which fiscal policy effectiveness is affected. Capital flows, especially FDI flows, play an important role in determining the sizes of fiscal multipliers, and a country’s external conditions largely explain GDP changes after fiscal expenditure shocks. Our results also point toward a strong link between a country’s international position and its real economy.
Fiscal policy, Government spending multiplier, Fiscal transmission mechanism, Cross-country heterogeneity, International linkage
Graduate School of Economics,
Research Institute for Economics and Business Administration,
Rokkodai-cho, Nada-ku, Kobe