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Journal number 4 ∘ Maya Grigolia
Fiscal Policy Multiplier Calculation Using Input-Output Tables for Georgia

Expanded Summary

Fiscal multipliers are used to estimate the effectiveness of fiscal policy (Samuelson, P.A. 1948). Due to the complexity of the fiscal policy and transmission mechanisms, existing estimates of multipliers in the literature vary widely from negative to positive numbers. Those who are skeptical about the effectiveness of discretionary fiscal policy mainly refer to those academic papers resulting in smaller fiscal multipliers, while those who believe in the effectiveness of fiscal policy rely on the research that yields larger multipliers. This article represents another step forward in a discussion about the empirical assessment of fiscal effects for Georgia.

Both, applied theoretical and empirical literature, have shown that the general economic situation and the positioning of monetary policy influence the fiscal multiplier (Blanchard, O., Perotti, R. 2002). Depending on what will be the response of monetary policy (it will increase nominal interest rates in response to the inflation caused by fiscal expansion or maintain the same nominal interest rate level and thus allow the real interest rate to go down), it may crowd out or contrary, increase the private investment which sensitively depends on the interest rate. For estimating the fiscal multiplier in this article, we assumed that interest-sensitive private expenditure and investments are constant. Therefore, the methodology presented in this article is a conservative approach to estimate the fiscal multiplier when there is a deep demand shock recession. Of course, this is a period when the action to stabilize the economy is most needed. Moreover, when calculating fiscal effects, it is important to take into account the share of import in the local production and consumption. To correctly calculate the import propensity, we used input-output table, which are based on supply and use tables[1] of national accounts.

After generating the Input-Output tables for Georgia, we show that 43.3% of imports in 2016 are consumed by households (directly and indirectly) and 32.4% are exported. Investment (18.8%) and public consumption (5.4%) have a relatively low rate of import consumption. In addition, 74% of imports that are consumed by households are in the form of final goods and services, while the remaining 26% are intermediate goods in local production induced by local demand. 75.2% of imports were exported directly, while 24.8% were used to produced export goods and services. It is clear that in countries with high imports the effects of increased government spending to encourage higher aggregate demand are draining. Considering this drain, we found that the multiplier of fiscal policy impact on net domestic production in Georgia was 1.35. This value is higher than in the Czech Republic (due to a low rate of marginal propensity to consume) and lower than in Greece (where the marginal propensity to consume is much higher). Also, countries with developed local production have a higher multiplier than Georgia. For example, such countries are Germany, France, and Austria (1.71, 1.69 and 1.57 respectively).

[1] United Nations publication. Department of Economic and Social Affairs, Statistics Division. Handbook on Supply, Use and InputOutput Tables with Extensions and Output Tables with Extensions and Applications, 2018.

National Statistics office of Georgia: https://www.geostat.ge/ka/modules/categories/291/resursebisa-da-gamoqenebis-tskhrilebi