The asymmetric effect of fiscal policy on private consumption and private investment over a business cycle: Evidence from Sub‐Saharan African countries

Abstract

This study examines the response of private consumption and private investment to an exogenous shock of fiscal policy and estimates the size of fiscal multipliers during periods of economic slacks and positive output gap. Panel vector autoregressive (VAR) estimation technique is performed on a sample of 18 Sub‐Saharan African (SSA) countries for the period 2000–2018. The study finds that the output’s fiscal impact multiplier is larger during contractions than during expansion. Furthermore, in contractions, the fiscal multipliers are 0.06% for private consumption and 0.6% for private investment. Meanwhile, in expansions, they are −0.03 for private consumption and −0.04% for private investment. The findings of this study are consistent with the results of previous studies predicting Keynesian views. Thus, to earn sizable, persistent, and long‐lasting effects through fiscal policy, this study recommends that spending programs should account for countercyclical fiscal policy and consider consumption and investment decisions before implementation. Moreover, the fiscal spending interventions tend to target rule‐of‐thumb households and financially constrained firms.

Fiscal multipliers and structural economic characteristics: Evidence from countries in sub‐Saharan Africa

“… Economic cycle fluctuations: The effects of a discretionary fiscal policy on real GDP are larger in downturns than in expansions (e.g. Hlaváček et al, 2021; Honda et al, 2020; Ilzetzki et al, 2013; Koh, 2016; Sedighi et al, 2021; Woldu, 2022). In times of recession, the availability of excess capacity in the economy raises the effectiveness of fiscal policy due to the decreased likelihood of crowding‐out private spending.…”

“…Despite many policymakers and scholars agreeing on the interdependence among fiscal policy, real output and macroeconomic variables, a consensus has not yet been reached regarding the magnitude and persistence of fiscal impulses on output in developing countries. For example, in reference to developing countries (Appendix 1), panel studies using different quantitative models predict heterogeneous size values of multipliers, that is, −0.03% (Ilzetzki et al, 2013), 0.17% (Estevão & Samaké, 2013), 0.48% (Kraay, 2014), 0.39% (Contreras & Battelle, 2014), 0.63% (Koh, 2016), 0.2% (Furceri & Li, 2017), 0.7% (Shen et al, 2018), 0.7% (Arizala et al, 2020), 0.1% (Honda et al, 2020), 0.81% (Sheremirov & Spirovska, 2022) and 0.06% (Woldu, 2022) all demonstrating considerable heterogeneity and persistent fiscal impulses.…”