Publication detail

Reassessment of the Fiscal Multiplier in Developing Countries: Regime-Switching Model

Author(s): PhDr. Michal Hlaváček Ph.D., Ayaz Zeynalov
Ilgar Ismayilov M.A., Ayaz Zeynalov
Type: IES Working Papers
Year: 2020
Number: 4
ISSN / ISBN:
Published in: IES Working Papers 4/2020
Publishing place: Prague
Keywords: Fiscal multiplier, developing countries, regime-switching, the panel threshold vector autoregression model
JEL codes: E32, E62, G15, C54
Suggested Citation: Hlavacek M., Ismayilov I. and Zeynalov A. (2020): "Reassessment of the Fiscal Multiplier in Developing Countries: Regime-Switching Model" IES Working Papers 4/2020. IES FSV. Charles University.
Abstract: The existing literature on fiscal policy has mainly employed linear models that found a small fiscal multiplier in developing economies. These findings challenge the importance and effectiveness of fiscal policy for these countries. However, linear models are not capable of distinguishing the size of the fiscal multiplier in different phases of economic cycles. Responding to some recent studies that confirm regime dependency of a fiscal multiplier, our model enriches the literature of regime-switching models using a nonlinear panel threshold vector autoregression (PTVAR) model to measure the size of the fiscal multiplier for developing countries. Our finding confirms asymmetry in the response of GDP with regard to the economic situation. The main result of our paper shows that the response of GDP to government expenditure shock during a recovery period for developing countries is double that for developed ones. Our results also confirm a significantly larger fiscal multiplier during recovery compared to economic downturn.
Downloadable: wp_2020_04_Ismayilov
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