Cyclical variation of the fiscal multiplier in Turkey

Abstract

ABSTRACT This paper investigates the cyclical variation in the government spending multiplier for Turkey from 1990:q1 to 2015:q4. We use a time series model, namely the local projection method, to estimate the variation in the fiscal multiplier under two different regimes: low and high growth regimes with respect to long-term economic growth. Our results confirm that fiscal policy is more effective in times of low growth than high growth. Turning to the components of government spending, we find that the government investment multiplier is larger than the government consumption multiplier in both regimes. This evidence supports the view that an expansionary fiscal policy via public investment has a more profound effect on output than via public consumption. However, we also find evidence that the influence of government consumption on GDP increases substantially in times of low growth. We, therefore, suggest that policymakers use public investment rather than public consumption to stimulate the economy during economic expansion and increase public consumption during economic slowdowns.