Tom Pesso

This paper studies the impact of the sign and magnitude of fiscal shocks on the fiscal multiplier. Through a theoretical examination, it highlights the significance of both the sign and magnitude of the shock in determining the multiplier. The study introduces a new empirical methodology, the Local Linear Local Projection, to detect complex non-linear patterns. When applied to US data, the methodology reveals that the degree of nonlinearity captured in the data varies with the identification strategy employed. Notably, zero does not appear to be a significant tipping point in the nonlinearity of the fiscal multiplier.

This paper investigates the interplay between discretionary fiscal policy and inflation in the euro area, emphasizing the role of public debt levels in modulating this relationship. It explores how fiscal expansions or contractions influence inflationary pressures, particularly under varying debt conditions. The analysis reveals that fiscal policy’s effect on inflation is non-linear, with debt levels significantly affecting the inflationary outcome of fiscal measures. High debt levels tend to amplify the inflation response to fiscal expansions, a finding that holds under multiple analytical frameworks and robustness checks. This paper contributes to the empirical literature by highlighting the critical role of fiscal policy, especially in high-debt environments, and its implications for inflation dynamics in the euro area.