The Euro Area Government Spending Multiplier in Demand- and Supply-Driven Recessions

Mario Di Serio, Matteo Fragetta (), Emanuel Gasteiger and Giovanni Melina

No 9678, CESifo Working Paper Series from CESifo

Abstract: We estimate government spending multipliers in demand- and supply-driven recessions for the Euro Area. Multipliers in a moderately demand-driven recession are 2-3 times larger than in a moderately supply-driven recession, with the difference between multipliers being non-zero with very high probability. More generally, multipliers are inversely correlated with the deviation of inflation from its trend, implying that the more demand-driven a recession, the higher the multiplier. Median multipliers range from -0.5 in supply-driven recessions to about 2 in demand-driven recessions. The econometric approach leverages a factor-augmented interacted vector-autoregression model purified of expectations (FAIPVAR-X). The model captures the time-varying state of the business-cycle including strongly and moderately demand- and supply-driven recessions, by taking the whole distribution of inflation deviations from trend into account.

Keywords: fiscal multiplier; business cycle; interacted panel VAR; factor models; Euro Area (search for similar items in EconPapers)
JEL-codes: C32 C33 C38 E32 E62 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-eec and nep-mac
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Related works:
Journal Article: The Euro Area Government Spending Multiplier in Demand‐ and Supply‐Driven Recessions (2024)
Working Paper: The Euro Area Government Spending Multiplier in Demand- and Supply-Driven Recessions? (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9678

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