Essays on Fiscal Policy

Abstract

The central question when evaluating the effects of government spending on GDP, is whether the fiscal multiplier is greater or lower than 1, or equivalently, the direction and strength of fiscal spillovers. I study the role of firm size heterogeneity and credit market imperfections for firms' financing decisions on the size of the fiscal multiplier. Specifically, this dissertation asks: How does firm size heterogeneity affect the fiscal multiplier? Are fiscal spillover heterogeneous by firm size?

I show that the local fiscal multiplier increases with the share of small firms, implying multipliers of 0.95-2.15 in the interquantile range. At micro level, I document positive spillovers for small firms and neutral for large firms. Small firms increase operating revenues, investment and financing relative to large firms after a local fiscal stimulus. I interpret these findings with a two-firm open economy New Keynesian model with the financial accelerator mechanism. The model implies that a higher share of small firms also increases the national fiscal multiplier if monetary policy does not respond aggressively to fiscal shocks.