Government expenditure multipliers under oil price swings

This paper aims at evaluating the impact of government expenditure on the Gross Domestic Product (GDP) under oil price swings. We particularly distinguish the expenditure multipliers in two cases of periods of oil price increase and decrease. For this purpose, we adopt a methodology of Structural Vector Autoregressive Model (SVAR) augmented by a dummy variable describing the oil price inflation movements. We solve the model for a sample of 18 Arab countries of oil exporting and oil importing countries. The results show that, under oil prices decrease, the expenditure multipliers are much higher than under oil price increase and could attain more than one for many countries in the sample, in the short run while going beyond the value of two in the long run. Moreover, it is noted that, on average, spending multipliers in the oil exporting countries are higher than those in oil importing countries at the time of low oil prices, while the opposite is noticed at the time of increased oil prices. These results are in line with what is observed in the recent literature about fiscal multipliers, in the advanced economies, being large in time of recessions while being weak or even negative in time of expansions. For many oil exporting countries, a sustained decrease in oil prices is to be considered as a proxy for recession cycle. In fact, a sustained decrease in oil prices is more likely to induce these countries in recessions. Considering the previous results, the fiscal policy should be designed accordingly. Especially in oil exporting countries, fiscal policies should be countercyclical to the oil prices cycle. In time of recessions, an increase in government projects are welcomed by the economy, while in time of expansions, which is the case in time of oil price increase, some of the government expenditures are likely to crowd out the private activities, which leads to lowering expenditure multipliers.