Fiscal multipliers in the Norwegian economy

In this report, we analyse effects of various fiscal policies by means of the large-scale macroeconometric model MODAG, developed by Statistics Norway. The main focus is on quantifying fiscal multipliers for the Norwegian economy. By fiscal multipliers, we mean the total effects of a change in a particular fiscal instrument on one or several macroeconomic variables, mainly GDP.

Simulations on the main model with endogenous exchange rate, interest rate and immigration in addition to a long run financial accelerator in the household sector, show that the multiplier for GDP mainland economy of a permanent increase in public consumption (public employment, intermediate inputs and consumer services from the private sector) is between 1.0 and 1.7 in the short and medium term. The long run multiplier for GDP mainland economy is close to unity and indicates that crowding-out effects in the Norwegian economy are not particularly strong. One reason is that demand impulses will affect labour immigration in such a way to dampen impulses on Norwegian unemployment. By a balanced budget change, in that the increase in public consumption is financed by increased direct taxes, the multiplier for GDP mainland economy is between 0.9 and 1.1 in the short and medium term and around 0.3 per cent in the long run. Calculating the fiscal multipliers in the same way as in recent DSGE (Dynamic Stochastic General Equilibrium) models, that is by means of a balanced shift with increased public expenditures on intermediate inputs and increased taxes, we find quite similar results as what is found in the DSGE-literature. The fiscal multiplier calculated by MODAG is then close to 0.5 in the medium term and nearly half of that in the long run.

The fiscal multiplier is calculated with an unemployment rate close to the last twenty years average of 3.5 per cent in the reference scenario.