Resolving Fiscal Multiplier Heterogeneity Under Sovereign Debt Constraints: A Panel Threshold Cointegration Approach for Emerging Market Economies

Abstract

Persistent divergence in fiscal multiplier estimates across emerging market economies (EMEs) undermines the calibration of countercyclical expenditure policies, particularly under binding sovereign debt ceilings. This study employs a panel threshold cointegration framework augmented with time-varying structural parameters to disentangle state-dependent multiplier heterogeneity across 34 EMEs over the period 1995–2023. Instrument validity is assured via Generalized Method of Moments identification with Bartlett-kernel heteroskedasticity-autocorrelation consistent corrections. Empirical results indicate that government consumption multipliers contract sharply—falling below unity—once the debt-to-GDP ratio breaches the 72.4% threshold, with expenditure composition and monetary policy accommodation jointly moderating the transition mechanism. These findings offer actionable benchmarks for debt-sensitive fiscal consolidation strategies and structural budget rule design in developing economies.