GOVERNMENT SPENDING MULTIPLIERS IN GOOD TIMES AND BAD TIMES: THE CASE OF EMERGING MARKETS

We investigate the presence of nonlinear effects of government spending shocks during good and bad times in a panel of 17 emerging markets through the lens of a Bayesian panel threshold VAR model. We find that the responses of gross domestic product, consumption, investment, trade balance, real exchange rate, and real interest rates vary depending on the state of the economy. Particularly, in slump periods, both consumption and investment may respond negatively to a government purchase stimulus, unlike in normal times. Our estimated government spending multipliers are less than one in the two regimes and can be zero in bad times.