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Sectoral Fiscal Multipliers and Budget Inflexibility: The Role of Allocative Inefficiency

Author

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  • Gomez-Gonzalez, Jose Eduardo
  • Valencia, Oscar
  • Herrera, David
  • Zapata, Steven

Abstract

This paper studies fiscal multipliers in Colombia, an emerging economy with a high degree of inflexibility of expenditure at the sectoral level. The results show that the multiplier is almost twice as large in sectors in which the execution of flexible expenditure is favored over inflexible expenditure. This result is closely related to the fact that flexible expenditure is done in capital intensive sectors. Microsimulation estimations show that the reallocation of a 1% from inflexible to flexible spending has a positive effect of approximately 17% on the total fiscal multiplier. We provide empirical evidence of an inverted U-shaped fiscal multiplier on the reallocation effect across sectors.

Suggested Citation

  • Gomez-Gonzalez, Jose Eduardo & Valencia, Oscar & Herrera, David & Zapata, Steven, 2020. "Sectoral Fiscal Multipliers and Budget Inflexibility: The Role of Allocative Inefficiency," Working papers 59, Red Investigadores de Economía.
    • Handle: RePEc:rie:riecdt:59
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    References listed on IDEAS

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    1. Aart Kraay, 2014. "Government Spending Multipliers in Developing Countries: Evidence from Lending by Official Creditors," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(4), pages 170-208, October.
    2. 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.
    3. Juan Carlos Echeverry & Leopoldo Fergusson & Pablo Querubin, 2004. "La Batalla Política Por El Presupuesto De La Nación: Inflexibilidades O Supervivencia Fiscal," Documentos CEDE 2944, Universidad de los Andes, Facultad de Economía, CEDE.
    4. Ramey, Valerie A. & Shapiro, Matthew D., 1998. "Costly capital reallocation and the effects of government spending," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 145-194, June.
    5. Ana Maria Iregui B & LIGIA MELO B & JORGE RAMOS F, 2006. "¿Hacia dónde se dirigen los recursos de Inverersión del Presupuesto General de la Nación?," Apuntes del Cenes, Universidad Pedagógica y Tecnológica de Colombia, December.
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    More about this item

    Keywords

    Fiscal multipliers; Spending reallocation; Emerging market economies; Colombia;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development

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