Econometric Analysis of Regime Switches and of Fiscal Multipliers

Debates on the appropriate response of fiscal policy to economic downturns, such as the debates on the merits of austerity measures in Europe, have been centered on the size of the fiscal multipliers. Indeed, empirical and theoretical evidence suggests larger multipliers at times of recession than in expansions, thereby conditioning the success of fiscal consolidation − the higher the multi-plier, the more costly the austerity would be in terms of growth of output. We extend the technique of vector autoregressions (VARs) to account for the possi