How much do we know about the “fiscal multiplier†(the effect of a change in the fiscal deficit on GDP) and what implications?
A recent paper ( 1) reached some important findings regarding the fiscal multiplier, i.e. the effect of a change in the fiscal deficit on GDP, in OECD countries: The fiscal multiplier associated with a change in public spending is between 0.6 and 1; The fiscal multiplier associated with a change in taxes is between 2 and 3; N o other result was robust (regarding for example the effect of the economy’s cyclical position on the level of the fiscal multiplier). Th ese findings are very important: to kick-start the economy during recessions, it is preferable to lower taxes; to reduce the fiscal deficit during economic recoveries, it is preferable to reduce public spending, which has a smaller negative effect on growth. OECD countries have done the opposite, especially during recessions. V. Ramey (2019) “Ten Years after the Financial Crisis: What Have We Learned from the Renaissance in Fiscal Research ? †NBER Working Paper no. 25531, February