Endogenous Threshold Cointegration with Regime-Dependent Fiscal Multipliers: A Nonlinear State-Space Decomposition Framework for Heterogeneous Panel Economies

Abstract

This study develops a novel nonlinear state-space decomposition framework integrating endogenous threshold cointegration with regime-dependent fiscal multiplier estimation across heterogeneous panel economies. Existing linear approximations inadequately capture structural breaks and asymmetric transmission mechanisms embedded in fiscal policy cycles. Employing a panel smooth transition regression (PSTR) model augmented with cross-sectional dependence corrections and common correlated effects (CCE) estimators, we analyze 42 OECD and emerging-market economies over 1995–2023. Results confirm the existence of dual fiscal regimes governed by public debt thresholds near 72% of GDP, with expenditure multipliers exhibiting pronounced counter-cyclical asymmetry. High-debt regimes yield multipliers significantly below unity, while low-debt regimes sustain above-unity multipliers. These findings carry direct implications for sovereign fiscal consolidation design and macroprudential coordination under post-pandemic budgetary stress environments.