The fiscal position can affect fiscal multipliers through two channels. Through the Ricar-dian channel, households reduce consumption in anticipation of future fiscal adjustments when fiscal stimulus is implemented from a weak fiscal position. Through the interest rate channel, fiscal stimulus from a weak fiscal position heightens investors’ concerns about sovereign credit risk, raises economy wide borrowing cost, and reduces private domestic demand. We document empirically the relevance of these two channels using an Interactive Panel Vector Auto Regression model. We find that fiscal multipliers tend to be smaller when fiscal positions are weak than strong. Link to the article
HUIDROMA, R., AYHAN KOSE, M., LIM, J., OHNSORGE, F.L. and FRANZISKA, L.O. (2020). Why do fiscal multipliers depend on fiscal Positions? Journal of Monetary Economics, 114, pp. 109-125.