Monetization and the Fiscal Multiplier

We investigate the size of Italian fiscal multipliers over the period 1872–2006. By instrumenting total expenditure with defence expenditure, we measure the multiplier under different business and monetary policy regimes, also employing a time-varying parameters model to encompass structural changes. We explore the nexus between the multiplier and monetization using the treasury monetary base, a policy instrument used in Italy during the period, as a novel measure of monetization. Results suggest that when monetization and economic slackness occur jointly, the fiscal multiplier tends to be larger. Monetization does not significantly affect the multiplier during expansions.