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How Strong are Fiscal Multipliers in the GCC?

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  • Mr. Raphael A Espinoza
  • Mr. Abdelhak S Senhadji

Abstract

The effectiveness of fiscal policy in smoothing the impact of shocks depends critically on the size of fiscal multipliers. This is particularly relevant for the GCC countries given the need for fiscal policy to cushion the economy from large terms of trade shocks in the absence of an independent monetary policy and where fiscal multipliers could be weak dues to substantial leakages through remittances and imports. The paper provides estimates of the size of fiscal multipliers using a variety of models. The focus is on government spending since tax revenues are small. The long-run multiplier estimates vary in the 0.3-0.7 range for current expenditure and 0.6-1.1 for capital spending, depending on the particular specification and estimation method chosen. These estimates fall within the range of fiscal multiplier estimates in the literature for non-oil emerging markets.

Suggested Citation

  • Mr. Raphael A Espinoza & Mr. Abdelhak S Senhadji, 2011. "How Strong are Fiscal Multipliers in the GCC?," IMF Working Papers 2011/061, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2011/061
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    References listed on IDEAS

    as
    1. Nakibullah, Ashraf & Islam, Faridul, 2007. "Effect of government spending on non-oil GDP of Bahrain," Journal of Asian Economics, Elsevier, vol. 18(5), pages 760-774, October.
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    3. Ethan Ilzetzki & Carlos A. Vegh, 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?," NBER Working Papers 14191, National Bureau of Economic Research, Inc.
    4. Ilzetzki, Ethan & Mendoza, Enrique G. & Végh, Carlos A., 2013. "How big (small?) are fiscal multipliers?," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 239-254.
    5. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1329-1368.
    6. International Monetary Fund, 2010. "The Cyclicality of Fiscal Policy in the Middle East and Central Asia: Is the Current Crisis Different?," IMF Working Papers 2010/068, International Monetary Fund.
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    Keywords

    WP; spending; GDP; estimate; country;
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