Abstract:

We introduce the notion of marginal cumulative multiplier — the effect of either govern
ment spending or taxation on output holding the other fiscal instrument constant- and
apply it to a well known panel of consolidation episodes in 16 countries in the period 1978
2020. In our benchmark specification we estimate a marginal spending multiplier at two
years of 1.5 and a marginal tax multiplier close to 0. We also estimate similar multipliers
by applying the policy counterfactual method of McKay and Wolf (2023). In an extensive
robustness analysis we never find spending multipliers below 1.3 or tax multipliers higher
than-1. These findings are seemingly in contrast to those of much of the existing literature
on fiscal multipliers, which typically finds higher tax than spending multipliers. We show
that this contradiction disappears once the fiscal variables used in the literature are scaled
by the proper factor.