Fiscal Multipliers in Times of War and Peace

Advisor: Eduardo Zilberman

The last financial crisis has brought attention to the impact of fiscal policy on the economy. Recent literature has focused on estimating fiscal multipliers under the assumption that they are not affected by the state of the economy. The present study relaxes this approach assuming that government spending is subject to an unobservable Markov process. This estimation is used to calibrate a dynamic model embodied with nominal and real rigidities whose solution takes into account the fact that the economy is subject to regime changes (big war episodes). Results show that multipliers are different depending on whether the economy is in peace or war periods.