Abstract
This paper evaluates the effectiveness of fiscal policy by employing a structural panel vector autoregression model with a shock to fiscal spending identified via theoretical robust sign restrictions. Using an annual data set of 120 countries over the period 1960–2014, the results show that fiscal multipliers are larger in advanced economies, when public debt is low, at a high level of financial development, in a financial crisis, and during business cycle downturns. Contrary to conventional wisdom, fiscal multipliers are not necessarily smaller in countries that are relatively open to trade and capital flows and operating under flexible exchange rate regimes. The relationship between the size of fiscal multipliers and the three dimensions of openness—trade openness, capital mobility, and exchange rate flexibility—hinges on the response of the real exchange rate and the domestic monetary policy pursued.
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