Abstract

The effects of fiscal multipliers on the Gross Domestic Product of a country have been the subject of much debate and discussion over the years. There has been a consensus on the subject that models can, with greater ease as compared to empirical studies, identify differences between fiscal instruments and structural characteristics of an economy. Findings acquired from existing research studies highlight how considerable agreement exists between models in terms of the overall size of fiscal multipliers. The aim of this paper, therefore, is to assess and determine the extent to which fiscal stimulus influences GDP and analyze its short-term and long-term effects.

Fiscal Multipliers and GDP

Introduction

The interrelation between fiscal multipliers and GDP is rather complex and warrants critical considerations for policymakers managing an advanced economic framework. The complexity of the relation is mainly because of the several types of feedback loops that exist between the two entities. When it comes to economic growth, fiscal multipliers has an array if critical implications both in the long run and the short run (Sgherri & Zoli, 2009). Conversely, impressive positive economic indicators invariably facilitate fiscal adjustments in the long and short run. As a result, it is imperative that policymakers have a high level of awareness of the interactions that exist between fiscal multipliers and the GDP so as to be able to lower the debt to GDP ratio.

Background

There has been much discussion on the importance of fiscal multipliers in fostering strong and sustainable economic growth. Many linkages have been established between the two entities in the past and these all point at how fiscal multipliers are directly responsible for changes in Gross Domestic Product and economic performance. This paper aims to explain how fiscal multipliers have a direct impact on GDP

Literature Review

There are a number of literatures that have been referred to in order to complete this paper. Cottarelli & Jaramillo (2012) explain how there are basically two main channels through which fiscal multipliers affects GDP in the short term and long term. According to them, fiscal multipliers strengthen fiscal adjustments, fiscal accounts and fiscal sustainability which lead to a significant reduction in the overall risk of a fiscal crisis. They highlight how a weak fiscal standing was the primary cause of a financial crisis in euro area countries. On the other hand, Sgherri & Zola (2009) explain how differentials in risk premiums are traditionally dependent on time-varying factors. In a similar manner, Haugh et al. (2009) investigates how an increase in the aversion of global risks tends to magnify the importance of fiscal performances in various countries lying in the euro zone. Schuknecht et al. (2010) and Caceres et al. (2010) explain how weak fiscal multipliers have directly been linked to surge in deficits and public debts.

Discussion

The fiscal multiplier is the ratio of a change in national income caused by a change in government spending that causes it. More generally, the exogenous spending multiplier is the ratio of a change in national income in relation to any change in autonomous expenditure (expenditure ...