Three states of fiscal multipliers in a small open economy

This research reviews the effects of fiscal expenditures on economic output in a non-linear fashion for the Barbados economy. Using the Markov-Switching methodology, fiscal expenditure multipliers are estimated for each stage of the business cycle. The data indicates that a three-regime model is the best fit – capturing recession, normal growth and boom periods. Our findings suggest that increasing capital expenditure is positively correlated with economic growth at all stages of the business cycle, while increasing current expenditure could have a negative impact on economic activity during recessionary and normal growth periods. Current expenditure is positively correlated with economic growth only when the economy is recovering rapidly. The results suggest that the impact of fiscal policies depend on the stage of the business cycle in Barbados, a small open economy with a fixed exchange rate.