Fiscal Multipliers and Oil Price Fluctuations in Oil-Exporting Countries: Evidence from Gulf Cooperation Council Countries

Abstract

ABSTRACT The purpose of this paper is to analyze the effects of fiscal policy on non-oil GDP within the framework of the Gulf Cooperation Council (GCC) countries. The paper explores asymmetries related to oil price changes (increase vs. decrease) and the state of the business cycle (expansion vs. recession).We used panel structural vector autoregressive (VAR) model, augmented by exogenous ‘dummy’ variables to estimate fiscal multipliers within a nonlinear framework.The results suggest that (i) linear multipliers are moderate and in line with those found in previous studies; (ii) the multipliers are larger for capital than for current expenditures; (iii) when controlling for oil price changes, the expenditure multipliers are higher during oil market downturns (oil price busts); (iv) spending multipliers are significantly larger when the output gap is negative. The importance of these findings lies on their policy suggestions. These findings indicate that fiscal policy should be designed based on oil price movements and economic fluctuations.