Testing the effects of fiscal policy shocks on output growth in recession and expansion: empirical evidence from developing countries

This study estimates fiscal multipliers and evaluates the effectiveness of fiscal policy in a large panel of 107 developing countries over the medium term. Using Jorda's local projection model, the study finds that fiscal multipliers are more effective during recessionary times than expansion. The findings reveal that fiscal balance and investment are more effective fiscal policy tools to stimulate output growth during recessionary times in developing countries. Quantitatively, the estimates suggest that fiscal multipliers tend to be as low as 0.16 and as large as 2.1 during times of recession. The baseline results broadly hold when fiscal policy shocks are subject to a battery of robustness check exercises in the medium-term framework. Also, the study reports heterogeneities in the size of fiscal multipliers with multipliers being larger and persistent in upper middle-income economies than lower middle-income economies. Furthermore, the study finds that tax-based measures as compared to expenditure-led policies are more stimulative during recessionary times. The study has important policy implications in terms of resorting to different fiscal tools in effectively boosting the output growth during recessionary times.