Government spending, multipliers, and public debt sustainability: an empirical assessment for OECD countries

This paper aims to quantify the linear and non-linear effects of government expenditure
on output and public debt sustainability using the Local Projections (LP)
approach on a dataset of 14 OECD countries considered for the 1981–2017 period.
By employing the Blanchard and Perotti strategy to identify fiscal policy shocks, we
show that government spending multipliers are close to one in linear models and
that expansionary fiscal policy stimuli reduce the public debt-to-GDP ratio. When
considering non-linearities using the smooth transition LP model, findings show
that a fiscal policy shock leads to higher multipliers and a stronger reduction in the
public debt-to-GDP ratio in economic phases characterised by a high rather than a
low debt-to-GDP ratio. All results are confirmed even when government spending
expectations are considered.