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Ali Alichi, Mr. Ippei Shibata, and Kadir Tanyeri
Government debt in many small states has risen beyond sustainable levels and some governments are considering fiscal consolidation. This paper estimates fiscal policy multipliers for small states using two distinct models: an empirical forecast error model with data from 23 small states across the world; and a Dynamic Stochastic General Equilibrium (DSGE) model calibrated to a hypothetical small state’s economy. The results suggest that fiscal policy using government current primary spending is ineffective, but using government investment is very potent in small states in affecting the level of their GDP over the medium term. These results are robust to different model specifications and characteristics of small states. Inability to affect GDP using current primary spending could be frustrating for policymakers when an expansionary policy is needed, but encouraging at the current juncture when many governments are considering fiscal consolidation. For the short term, however, multipliers for government current primary spending are larger and affected by imports as share of GDP, level of government debt, and position of the economy in the business cycle, among other factors.
Ali Alichi, Mr. Ippei Shibata, and Kadir Tanyeri

pegged exchange rates or otherwise limited monetary policy (See Table A1 and A2 for exchange rate classifications of our sample countries). The five-year baseline fiscal multipliers are reported in Figure 10 . These are the effects of each shock on the level of GDP after five years. The government current primary spending multiplier is estimated at almost zero, meaning that after five years, the cumulative GDP effect of a consolidation through reducing government current primary spending is almost zero. In other words, if the government of this small state cuts

Mr. Daniel Leigh, Mr. Andrea Pescatori, and Mr. Jaime Guajardo
This paper investigates the short-term effects of fiscal consolidation on economic activity in OECD economies. We examine the historical record, including Budget Speeches and IMFdocuments, to identify changes in fiscal policy motivated by a desire to reduce the budget deficit and not by responding to prospective economic conditions. Using this new dataset, our estimates suggest fiscal consolidation has contractionary effects on private domestic demand and GDP. By contrast, estimates based on conventional measures of the fiscal policy stance used in the literature support the expansionary fiscal contractions hypothesis but appear to be biased toward overstating expansionary effects.
Mr. Daniel Leigh, Mr. Andrea Pescatori, and Mr. Jaime Guajardo

the exchange rate regime is pegged. The sum of the responses to Peg and Δ F show the effects of a consolidation occurring in a pegged exchange rate regime. The response to Δ F shows the effect of a consolidation occurring in a floating regime. The results suggest that the effect of fiscal consolidation on economic activity is more contractionary in pegged exchange rate regimes. A 1 percent of GDP fiscal consolidation reduces real GDP by 0.84 percent ( t -statistic = –4.15) within two years when the exchange rate is pegged, but by only 0.33 percent ( t