IMF Working Papers

Cyclical Fiscal Multipliers: Policy Mix and Financial Friction Puzzle

By Zamid Aligishiev, Hamed Ghiaie

May 30, 2025

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Format: Chicago

Zamid Aligishiev, and Hamed Ghiaie. "Cyclical Fiscal Multipliers: Policy Mix and Financial Friction Puzzle", IMF Working Papers 2025, 108 (2025), accessed June 2, 2025, https://doi.org/10.5089/9798229011242.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper investigates dynamic relationships between U.S. government expenditure multipliers and the economy's cyclical position from 1949 to 2018 using a Time-Varying Parameter Vector Autoregression (TVP-VAR) model. We challenge the existing literature, which predominantly relies on predefined economic regimes and assumes a stable relationship between fiscal multipliers and business cycles. Our findings identify two distinct periods: fiscal multipliers were counter-cyclical from 1949 to the late 1980s, followed by a significant decline in their effectiveness during recessions thereafter. These variations are attributed to the prevailing fiscal-monetary policy mix; with higher fiscal multipliers during earlier recessions resulting from sharp shifts toward a fiscally led policy stance, followed by a decline after the Dot-com recession due to a transition toward a monetary-led policy mix. We find particularly low multipliers during the global financial crisis, which provides new insights into the evolving role of financial frictions in the transmission of fiscal policy.

Subject: Business cycles, Economic growth, Economic recession, Expenditure, Fiscal multipliers, Fiscal policy

Keywords: Business cycle, Business cycles, Economic recession, Fiscal multipliers, Global, Policy mix, State-dependent multipliers

Publication Details

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