It would be very useful to know the value of the fiscal multiplier, but it is difficult to estimate

- "While all European Union countries are set to rapidly reduce their fiscal deficits, it would be very useful to know the value of the euro zone’s fiscal multiplier, in order to estimate the shortfall in growth resulting from the reduction in deficits. But at first sight it is difficult to estimate this multiplier. Empirical estimates vary a great deal (from 0.3 to around 1.6), which is fundamentally explained by the fact that the value of the fiscal multiplier essentially depends on many factors (behaviours):
• the degree of stickiness of nominal prices and wages; if prices and wages are perfectly flexible, the multiplier is zero;
• the degree of short-sightedness among economic agents: if they have long time horizons and if they are rational, the multiplier is zero ("Ricardian neutrality"); if they face a liquidity constraint, they spend all their income in each period and the multiplier is high;
• of course, the marginal propensities to save and import; if they are high, the fiscal multiplier is low;
• the reaction of interest rates and the exchange rate to the fiscal expansion; if there is a rise in interest rates and an appreciation of the exchange rate, the multiplier is obviously low."
- "When looking at these factors as a whole in the case of the euro zone, we conclude that the euro zone’s fiscal multiplier is very difficult to estimate:
• two criteria (significant price and wage stickiness, lack of reaction of interest rates and the exchange rate) lead to a high fiscal multiplier;
• two criteria (presence of Ricardian neutrality effects, high marginal propensity to import) lead to a low fiscal multiplier."

Natixis Flash Economics 464 20100916