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References

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*

We thank comments from Roberto Perrelli, Alfred Schipke, and George Tsibouris; participants in the Western Hemisphere Department Seminar; and Aiko Mineshima and Sohrab Rafiq from the Fiscal Affairs Department. Also, thanks to Allister Hodge, Michael Norris, and Garfield Riley from the Eastern Caribbean Central Bank for comments on an earlier draft. Joy Villacorte provided excellent editorial assistance.

1

In 2008–11, total central government revenues averaged 26 percent of GDP while total expenditure was on average about 30 percent of GDP.

2

Given the available quarterly data, the number of observations available for each ECCU member is about 64, at most, which would not allow for reliable estimations of VAR models with several lags that rapidly consume degrees of freedom.

3

The estimations presented in this paper are based on an extensive recent effort to estimate fiscal multipliers by Ilzetzki, Mendoza, and Vegh (2011), who estimated fiscal multipliers for a large set of countries using quarterly data and explored the impact of different country characteristics. Their results suggest that fiscal multipliers tend to be small and usually less than unity. Developed and closed economies usually have relatively larger fiscal multipliers that are statistically significant, while developing and open economies show smaller multipliers that often are not statistically different from zero.

4

Feasible generalized least squares should be used to obtain estimates of V, the covariance matrix of residuals. In practice, it turns out that the choice of V does not matter much and a one-stage ordinary least squares estimator of β is adequate.

5

All variables are in real terms. Fiscal variables are deflated using consumer price indexes due to the lack of specialized indexes.

6

All estimations included four lags. The Akaike information criteria (AIC) was not useful for determining the best number of lags as it always accepted a larger number of lags, whereas the Schwarz information criteria (SIC) suggested five lags. Four lags were used because the results do not differ substantially from those using five lags and to maintain comparability with the paper by Ilzetzki, Mendoza and Vegh (2011), on which this work is based.

7

In the approach used, the effects of changes in expenditure or taxes start only when the changes in the magnitude of those variables occur. Other approaches rely on the so-called ‘narrative” approach in which government’s announcements are studied and interpreted to identify policy changes even if those changes actually occur on a later date.

8

The estimation does not distinguish periods of expansion or recession. The multipliers are average estimators for the sample considered, which contains two recessions, in 2002–03 and 2009, and two periods of rapid expansion in 1994–95 and 2006–07.

9

A way to rationalize a positive effect on GDP resulting from an increase in tax collection would be that the expectation of improved public finances in the future stimulates economic activity by reducing the probability of future tax hikes or spending cuts of unknown magnitude and timing.

Fiscal Multipliers in the ECCU
Author: Mr. Jesus R Gonzalez-Garcia, Mr. Antonio Lemus, and Mr. Mico Mrkaic