Fiscal policy at the zero lower bound in emerging economies: evidence from Kuwait’s fixed exchange regime

Purpose Although fiscal policy plays a central role in stabilizing emerging economies, little is known about how it interacts with monetary policy. This paper examines fiscal-monetary interactions at the zero lower bound in a small open emerging economy, using evidence from Kuwait. Design/methodology/approach The paper employs linear and non-linear local projection models using quarterly data from 1982Q4 to 2024Q3. The fiscal multiplier is allowed to vary with the state of monetary policy, distinguishing between normal periods and those when interest rates remain persistently near the zero lower bound. Findings Fiscal transmission is strongly state dependent. Under normal monetary conditions, government spending multipliers are small and slightly negative, suggesting the presence of import leakages, partial monetary offset, and public-sector inefficiencies. When monetary policy is constrained by the zero lower bound, multipliers become positive but remain below unity. These findings indicate that fiscal policy is stronger at the zero lower bound, but structural factors still limit the size of the multiplier. Originality/value The paper offers novel evidence on fiscal-monetary interactions at the zero lower bound in a small open emerging economy. Using evidence from Kuwait, it demonstrates that abstracting from monetary policy states can obscure pronounced nonlinearities in fiscal transmission.