Fiscal multipliers in Emerging Market Economies: Can we learn something from Advanced Economies?

• We compute fiscal multipliers for Emerging Marker Economies and Advanced Economies.
• EMEs have smaller multipliers than AEs.
• We analyze the main determinants of multipliers in EMEs and AEs.
• EMEs and AEs have the same determinants but EMEs are more sensitive to them.
• The most important determinant is public debt for EMEs and trade openness for AEs.

It is a well-established fact that Emerging Market Economies (EMEs) have smaller fiscal multipliers than Advanced Economies (AEs). We confirm this difference for our sample using Panel VAR and Interactive Panel VAR (Saborowski and Weber, 2013) models. Then we analyze the impact of some macroeconomic factors on multiplier effects for EMEs and AEs separately. We argue that the development degree can modify the effect of the traditional determinants of fiscal multipliers. A Panel Conditionally Homogeneous VAR (Georgiadis, 2012) is used to test this statement. First of all, we find that the tested determinants (imports, public debt, savings, unemployment and financial development) act in the same way both in EMEs and in AEs. Secondly, public spending efficiency is relatively more sensitive to each tested determinant in EMEs than in AEs. Thirdly, the most important factor for improving fiscal policy efficiency in EMEs (public debt), differs from the one in AEs (openness to trade). Last but not least, we show that improving the tested determinants individually is not sufficient to achieve the same public spending efficiency in EMEs.