The Government Spending Multiplier in Latin American Countries: Does the Institutional Environment Matter?

Abstract

Mora and Acevedo (2019) report that the government spending multipliers in Latin American countries are notably higher than what is typically reported for developed economies. Latin American countries have been inclined towards using procyclical fiscal policies. Those policies have been perceived as having been effective at mitigating the effects of the 2008-2009 Great Recession. We estimate the government spending multiplier using Latin American panel data from twelve (12) Latin American countries, 2000-2014. Our estimates are conditional on the extent of (i) openness, (ii) capital mobility, and (iii) economic freedom. Based on the results, the latter is important: the less economically free a country, the larger its spending multiplier. Lower economic freedom in Latin American countries can help to account for their large spending multipliers. In particular, restrictions on international trade are positively associated with multipliers. This is the case even while controlling the trade share of GDP.