Decomposing Fiscal Multiplier Heterogeneity Under Sovereign Debt Distress: A State-Dependent Local Projection Framework for Emerging Market Economies

Abstract

Fiscal multipliers in emerging market economies (EMEs) exhibit pronounced cyclical asymmetry that standard representative-agent models systematically underestimate, particularly during episodes of sovereign debt distress. This study employs a state-dependent local projection methodology applied to a panel of 34 EMEs over 1995–2022 to disentangle the structural determinants of multiplier heterogeneity across debt-stress and non-stress regimes. Controlling for exchange rate flexibility, financial openness, and commodity export dependency, we find that government expenditure multipliers contract sharply—averaging 0.31 on impact—under high sovereign spread conditions, compared to 0.89 in tranquil periods. Crowding-out through sovereign risk premia and compressed private credit channels account for approximately 61% of this differential. These findings carry direct implications for the calibration of fiscal consolidation programs in IMF-supported adjustment arrangements.