Bank of Colombia paper charts fiscal multipliers in developing countries

Research published by the Central Bank of Colombia finds fiscal multipliers in developing economies may increase if central banks delay rate rises during periods of fiscal expansion.

In emerging countries, multipliers are found to be higher in fixed exchange rate regimes, during economic booms and monetary expansions. Countries with a floating exchange rate could enjoy bigger benefits by enhancing fiscal-monetary policy co-ordination, the authors say.

In fixed regimes, the GDP response is positive for six quarters after the implementation of the stimulus and then becomes neutral. In flexible regimes GDP also reacts positively for six quarters, but then it becomes negative, though close to zero.

The size of fiscal multipliers and the stance of monetary policy in developing economies by Jair Ojeda-Joya and Oscar Guzman finds “fiscal policy programmes would be more effective if the monetary policy reaction was more gradual.”

The authors argue that policymakers in developing economies should be careful before resorting to fiscal stimulus to overcome crises. “These fiscal programmes seem to have higher effects during economic booms and more importantly, during monetary expansions.”