Fiscal multipliers in turbulent times: the case of Spain

What are the output responses to fiscal policy? Although important contributions have been made in the literature, quantifying the size of the fiscal multiplier remains a challenge. Indeed, the challenge of estimating a unique fiscal multiplier is probably an ill-posed one. The magnitude of the multiplier may well depend on country- and time-specific characteristics of the fiscal stance under scrutiny. In this paper, we estimate state-specific multipliers for Spain depending on the state of the economy along several dimensions. The government spending multiplier is estimated to be larger during recessions and banking stress periods, but much smaller (or even negative) during periods of weak public finances. Combining these three dimensions into a single global turmoil indicator via principal component analysis, the estimated multipliers are 1.4 for crisis (or turbulent) times and 0.6 for tranquil times.