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The fiscal position can affect fiscal multipliers through two channels. Through the Ricardian channel, households reduce consumption in anticipation of future fiscal adjustments when fiscal stimulus is implemented from a weak fiscal position. Through the interest rate channel, fiscal stimulus from a weak fiscal position heightens investors' concerns about sovereign credit risk, raises economy-wide borrowing cost, and reduces private domestic demand. The paper documents empirically the relevance of these two channels using an Interactive Panel Vector Auto Regression model. It finds that fiscal multipliers tend to be smaller when fiscal positions are weak than strong.
Business Cycle --- Economic Adjustment and Lending --- Economic Policy, Institutions and Governance --- Finance and Financial Sector Development --- Financial Crisis Management and Restructuring --- Fiscal and Monetary Policy --- Fiscal Multipliers --- Fiscal Position --- Interest Rate Channel --- Macroeconomic Management --- Macroeconomics and Economic Growth --- Public Sector Development --- Ricardian Channel --- State-Dependency
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