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Fiscal Multiplier:Insight and Assessment

The fact that fiscal policy has taken one of the central roles in combating the global financial crisis (2008-2009) and dealing with its aftermath, has once again highlighted the importance of the design, measurement and implementation of fiscal policy. Well-designed fiscal policy can support medium term macroeconomic stability, an essential prerequisite for economic growth. However, while implementing the fiscal policy, the choice of fiscal instruments can have considerable impact on economic and budgetary effects. For example, international practices of successful fiscal consolidation are usually ones that based fiscal tightening on the reduction of government spendings rather than on the reduction of public investment or increase in taxes. Therefore, the role of fiscal multiplier as a tool of ensuring the accuracy of macroeconomic forecasting has increased.
Fiscal Multiplier measures short-term impacts of discretionary fiscal policy. It is usually defined as the ratio of the change in output to the change in government spendings and/or tax revenues. The Literature relies on various methodologies to derive fiscal multiplier, as this process involves number of country specific characteristics, however, obtaining precise estimates, is a big handle. Unavailability of high-frequency and reliable data, usually for the developing countries, shrinks the ability to identify exogenous effect of the fiscal change on the level of output.
To address this shortcoming, International Monetary Fund proposed relatively simple approach to calculate country's fiscal multiplier. This, so called, bucket approach, is based on the general findings from the literature. It arranges counties into three groups that are expected to have similar multiplier according to their structural and conjunctural characteristics. According to IMF methodology, Georgia's fiscal multiplier falls in the range of 0.467-0.701, meaning that 1 Lari equivalent fiscal change causes the output to change on average by 0.5-0.7 Lari (nominal GDP).
However, the bucket approach only provides rule-of-thumb guidance on the size of fiscal multiplier and it cannot be applied in mechanical way. Therefore, the study also provides SVAR estimation.
The findings are in line with similar researches conducted in the case of other (developing and developed) countries: The effect of changes in fiscal instruments, utilized to establish the fiscal policy stance, on the output have different size and duration. In particular, government consumption shocks (annual as well as quarterly) have positive effect on output at the beginning of the period but then tend to become negative. Tax revenue shock have a negative, while government investment shocks have positive effect on the level of output throughout the whole period, but tend to become smaller in the end of time horizon.
This paper is structured as follow: section two gives insight into the theoretical and empirical background about fiscal multipliers. Section three estimates fiscal multipliers based on the bucket approach provided by International Monetary Fund. Section four provides SVAR estimation by briefly explaining the methodologies and data used and by presenting the main results.  (Read complete document in Georgian)