The bucket approach

In the case of countries where fiscal multipliers are not easily accessible, general conclusions from literature concerning other countries can be applied.

Specifically, it is possible to use the approach proposed by N. Batini and fellow researchers called the bucket approach, in which the examined countries are di-vided into three groups with similar multiplier values on the basis of their struc-tural features¹⁶⁶.

The selection of features and calculating their marginal effect on the mul-tipliers is based mostly on the research results of advanced countries. A simple method prepared by N. Batini and fellow researchers assumes that similar fac-tors affect multipliers in the economies of emerging markets and low-income countries where empirical estimates and those based on the model are not com-monly available and are often of low quality¹⁶⁷.

In the first year, the selection of general fiscal multipliers can be carried out in three stages. Firstly, the results should be ascribed to the appropriate country on the basis of how many structural features related to “large” multipli-ers it has. Definitions of features and thresholds are identical in all countries, except for the “safe” level of public debt which is probably lower in the mies of emerging markets and low-income countries, while developed econo-mies can withstand a higher debt without compromising the access to the mar-ket. In particular, one should ascribe the value one to each of the following fea-tures occurring in a particular country¹⁶⁸:

x Low level of trade openness. The economy is relatively closed and the ratio between import and domestic demand, on average, have amounted to below 30% in the past five years.

x High level of labour market rigidity. The country has strong trade unions and/or its labour market is strongly regulated (indicatively, “strong” means that the rigidity of labour market amounts to 0.8-1 indexes of labour market rigidity with the scale ranging from 0 (poor) to 1 (strong) – just as in the case of J. Botero, S. Djankov, R. Port and F.C. Lopez-De-Silanes¹⁶⁹).

x Low level of automatic stabilizers. Automatic stabilizers measured by the ratio of public spending to nominal GDP are low level (e.g. when the ratio is below 0.4).

166 N. Batini et al. (2014), as above, p. 14.

167 Ibidem, p. 14.

168 Ibidem, pp. 14-15.

169 See: J. Botero, S. Djankov, R. Porta, F.C. Lopez-De-Silanes (2004), The Regulation of Labor, “Quarterly Journal of Economics”, Vol. 119, No. 4.

x Fixed or quasi-fixed foreign exchange rates. Arranging the country’s ex-change rate is not entirely flexible. The countries might be ascribed the value one, if the annual statement concerning monetary arrangements and foreign exchange restrictions includes the following foreign exchange arrangements:

lack of own legal tender; currency board; fixed exchange rate regime; stabi-lized exchange rate regime; crawling peg; exchange rate regime similar to crawling peg. The countries within one currency area generally receive 1 point (unless a fiscal shock takes place in all the countries at the same time, which most likely would result in a common reaction to foreign exchange rate).

x Low or safe level of public debt. Gross public debt of the country is below the level commonly considered “safe” by the financial markets (namely, with relatively low-risk premium). In developed economies, this level may be treated as 100% of GDP, whereas in the economies of emerging markets, the threshold amounting to 40% of GDP is applied. These thresholds are only in-dicative. In some cases, the debt ratio does not ensure proper pattern for the state of public finances and should be supplemented with other indicators of fiscal space, such as fiscal balance, share of debt against residents or status of public bonds as a safe harbour for investments in the countries with interna-tional currency.

x Effective management of public expenses and state revenues. On the ex-penditure side, the assessment might depend on the measurement structure of efficiency of the programme concerning government expenditure and finan-cial liability. On the revenue side, the calculations of tax efficiency (measured as the ratio of actual potential tax revenue) may constitute the first evaluation.

Secondly, the results should be summed up to specify the likely multiplier level in the first year (low, medium or high) in the so-called “normal” times.

Due to the limited empirical evidence concerning the relative significance of factors determining the multiplier level, all structural features receive identical weight. It may be assumed that the countries with total score ranging from 0 to 3 have a low level of multipliers, from 3 to 4 – medium, and from 4 to 6 – high.

Because the scores in the aforementioned ranges overlap, the countries with a total score amounting to 3 or 4 can belong to two categories. This flexibility enables the use of factors specific for a given country as well as marginal values of structural features¹⁷⁰.

Table 4.1 presents the ranges of multipliers for particular categories in the first year. Instead of points, each group of countries is assigned a multiplier range to consider the differences between countries of the same group and to

170 N. Batini et al. (2014), as above, pp. 15-16.

assess the selection of multipliers. The multipliers in the middle of the range (0.4-0.6) can be found in developed economies assuming that the fiscal shock (stimulus or exacerbation) is spread evenly between expenditure and revenue, and that cyclical conditions are “normal” (i.e. the demand gap is close to zero and the monetary policy is not limited). These three groups are also compliant in OECD with the distribution of multipliers based on models which are more or less evenly spread over three categories¹⁷¹.

Table 4.1. Ranges of multipliers in the first year (in normal times) Category of country Range of multiplier

Low level of multiplier 0.1-0.3 Medium level

of multiplier 0.4-0.6

High level of multiplier 0.7-1.0 Source: N. Batini et al. (2014), as above, p. 16.

Thirdly, the score is raised or lowered depending on whether the country is during the term of any condition specified in the list of “business” features.

Specifically¹⁷²:

x The phase of the business cycle is adjusted. If the economy is at the lowest point of the cycle, both the lower and the upper limit of multipliers is increased by approx. 60%. However, if the economy is in the peak phase of the cycle, both limits are reduced by 40%. When the demand gap equals zero, the adjust-ment should not be applied.

x The monetary policy is adjusted. If the monetary policy is ineffective, due to a low level of interest rates, the limits of multiplier range are increased by 30%. If the monetary policy is limited because of other reasons, multiplier ranges are increased by 0-30%.

However, the analysis of the impact of public spending on the economy does not enable a complete characterization of the macroeconomic situation. In addition, the borrowing needs of the state and public institutions should also be taken into account, i.e. the sources of financing state expenditure¹⁷³.

N. Batini and fellow researchers propose the use of a multiplied formula to consider the total impact of business features on the multiplier. The multiplier formula assumes that these characteristics interact with each other and

171 Ibidem, p. 16.

172 Ibidem, pp. 16-17.

173 B. Wieliczko, A. KurdyĞ-Kujawska (2015), Mechanizmy i impulsy fiskalne oddziaáujące na rozwój wsi i rolnictwa (1), IERiGĩ, Warsaw, p. 103.

quently accumulate. In particular, the upper and lower limits of the multiplier range should be adjusted in the following way¹⁷⁴:

, (13)

where: M is the final multiplier, MNT is the multiplier in “normal times” (origi-nating from the second stage), Cycle is a cyclic factor ranging between -0.4 and +0.6, Mon is the coefficient of monetary policy ranging between 0 and 0.3.

To illustrate the presented method, N. Batini and fellow researchers have calculated on its basis a number of multipliers in the first year for the USA.

They assumed that the United States have a negative supply gap. Tables 4.2 and 4.3 demonstrate how the general multiplier was taking shape in the first year.

Despite the fact that the public debt in the USA amounted to over 100% of GDP, it was classified as “safe”¹⁷⁵.

Table 4.2. Score granted on the basis of structural features Structural features USA

Relatively closed country 1

Rigid labour market 0

Low level of automatic stabilizers 1 Fixed foreign exchange rates 0

Safe level of public debt 1

Effective management of expenditure and revenue 1 Total effect 4 Source: N. Batini et al. (2014), as above, p. 18.

Table 4.3. Introducing the multiplier in the first year by means of the bucket approach

Result Multiplier range Value of the multiplier after raising or lowering the score

USA 4 Medium level (0.4-0.6) 0.6-0.9 USA 4 High level (0.7-1.0) 1.0-1.4 Source: N. Batini et al. (2014), as above, p. 18.

Because the total result amounts to 4, there is a possibility to choose the level of the multiplier (medium or high). Based on the existing empirical esti-mates and the prior knowledge, N. Batini and fellow researchers attribute the high level to the United States. The upper and lower ranges are regulated by the fol-lowing factors: 0.3 (moderately negative demand gap) and 0.1 (limited monetary

174 N. Batini et al. (2014), as above, p. 17.

175 Ibidem, p. 18.

M

M _NT˜1 ˜1

policy). The results of the presented approach appear reasonable¹⁷⁶. For compar-ison, A.J. Auerbach and Y. Gorodnichenko estimate that the multiplier of ex-penditure in the first year in recession amounts to approx. 1.4¹⁷⁷, while A. Baum and fellow researchers believe that the general multiplier during the economic slowdown amounts to 0.9 (assuming that half of the income can be attributed to expenditure)¹⁷⁸, and N. Batini, G. Callegari and G. Melina claim that with the same assumptions, the multiplier amounts to 1.2¹⁷⁹.

The bucket approach focuses on providing solely basic guidelines as to the size of fiscal multipliers and should not be used in a mechanical manner.

Although fiscal multipliers in the economies of emerging markets and low- -income countries may be similar in terms of coefficients to developed econo-mies, it is important to remember that the presented approach was calibrated for the study based on the latter group. In every case, the assessment should be car-ried out on the basis of previous research and economic theories, modifying multipliers accordingly. N. Batini and fellow researchers provide examples where further regulation of the multiplier level may be justified¹⁸⁰:

x When a large part of economy is controlled by the government and the private sector is sufficiently small (has limited crowding out effect of private de-mand), the multiplier can be revised upwards.

x In the economies with fixed exchange rates but, due to a currency mismatch, limited monetary policy in terms of financial stability, the multiplier can be revised upwards as well.

x In cases when fiscal regulation is highly reliable, the multiplier can be revised downwards. It has been observed that confidence effects can decrease the costs of fiscal consolidation.