Fiscal Multipliers and Political Fragmentation
This paper provides novel empirical evidence on how political fragmentation shapes the fiscal transmission mechanism. Using data from 16 OECD countries (1978-2019) and narrative accounts to identify exogenous fiscal interventions, we show that when political fragmentation is high, the fiscal GDP multiplier is significantly lower. The multiplier is above unity and relatively stable over time when fragmentation is low, but generally well below unity when fragmentation is high. We show that interventions are comparable across states and argue that a conditional confidence channel helps explain our findings: only in low-fragmentation periods do fiscal interventions boost household and business confidence, translating into stronger consumption and investment responses.