Regime-Dependent Fiscal Multipliers and Structural Adjustment in a Small Open Developing Economy

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Regime-Dependent Fiscal Multipliers and Structural Adjustment in a Small Open Developing Economy Roger C.D. McLeod Caribbean Development Bank

Abstract Understanding regime-dependent fiscal effects is important for effective fiscal policy design, but empirical work in this area has been sparse for small open developing economies. This paper uses Jamaica as a case study, given its economic characteristics and history of structural adjustment programs, to estimate regimedependent fiscal effects on output. Results indicate that tax multipliers on GDP are higher than expenditure multipliers in both states of the economy, while both increase sharply during recessions. This asymmetric and time-varying characteristic of the fiscal effects, as well as the magnitude of the multipliers, are largely in line with the results found in the literature on developing economies. Government expenditure multipliers are markedly low, which is also in line with the literature but presents opportunities for further investigation using disaggregated data. Regarding growth, the significantly higher taxation multiplier in conjunction with a heavier burden placed on taxation measures to meet fiscal targets are particularly restrictive in facilitating growth but paradoxically an important tool for stabilisation during episodes of current account crises.

JEL Classification: C24, E62, H30, O40 Key words: Markov Regime-Switching, Fiscal Policy, Structural Adjustment, Economic Growth.

I would like to thank Dorla Humes, Ian Durant and Amos Peters for their excellent comments. Author’s E-mail: mcleodr@caribank.org, mcleodroger1@gmail.com. This version: January 2019


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