Title: Endogenous fiscal multipliers
Authors: Ekkehard Ernst - International Labour Organization (Switzerland) [presenting]
Abstract: Estimates of fiscal multipliers show a large variation both in terms of size and magnitude. Differences in research strategies are in part responsible for the estimation heterogeneity but so are economic and fiscal conditions. For instance, estimated fiscal multipliers tend to be larger in economic downturns and when fiscal positions are initially strong. Nevertheless, even when controlling for such factors, a significant heterogeneity in estimates remain. We argue that even under similar economic circumstances, differences in social dynamics and communication can lead to differences in fiscal policy impacts. To this effect, we make a distinction between Ricardian and non-Ricardian households, borrowed from the recent New-Keynesian Philips curve literature. Then, in highly segmented markets where Ricardian households interact which each other frequently, fiscal policy interventions loose effectiveness very rapidly. Also, in environments with regular, repeated shocks, fiscal policy interventions are less effective than following sudden, rare events. Finally, we demonstrate that policy communication can lift the effectiveness of interventions even in those cases where the Ricardian effect dominates, depending on the type and structure of communication.