Changing patterns of fiscal policy multipliers in Germany, the UK and the US

This paper documents time variation in fiscal policy multipliers in Germany, the UK and the US over the period 1971–2009. The analysis is based on a quarterly vector autoregression (VAR) model. For the German and the UK cases, the VAR is augmented by “global factors” representing developments in the world economy. By estimating these models on different samples of data, our evidence indicates that fiscal multipliers have substantially changed over time, often in a non-monotonic way. In particular, for Germany, the net tax multiplier is found to follow a humped-shaped curve, peaking in the middle of the 1990s, declining thereafter, before rising again during the recent 2008–2009 crisis. Government spending shocks are found to be more powerful to stimulate output after the reunification. We show that significant crowding-in effects for private investments contribute to explain this finding. For the UK, we observe large variations in fiscal multipliers over the period, with non-Keynesian developments during the fiscal consolidation period of the 1980s. After that, British multipliers are low and only pick up at the very end of the sample, when the 2008–2009 crisis is included in the analysis. For the US, short-run multipliers appear to be broadly stable over the period, but medium-run multipliers tend to decline, in particular in the end of the 1980s and in the 1990s. This can be due to the large fiscal imbalances over this period that may have triggered Ricardian effects, before a fiscal surplus was achieved at the end of the 1990s.