How large are fiscal multipliers? A panel-data VAR approach for the Euro area

Ricardo Silva (), Vitor Carvalho and Ana Ribeiro
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Ricardo Silva: Faculdade de Economia, University of Porto

FEP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: In the current context where the limited role for monetary policy instruments apparently endows fiscal policy with higher effectiveness, European fiscal policy authorities are rather constrained by the fact of most countries being struggling against recessions together with the need to put public finances in a sustainable path. In this context, we assess how large are fiscal multipliers in Europe, for both aggregated and disaggregated spending and revenue variables. Moreover, we analyze how cycle phases and fiscal consolidation episodes shape the size of fiscal multipliers. We present evidence for the Euro area, relying on a VAR model with pooled annual data from 1998 to 2008. Estimation results show that, on average, transfers are the main driving force for the overall expenditure dynamics; moreover, wages exhibit negative impacts on output while positive effects are strongly driven by shocks in public investment and, to a lesser extent, by intermediate consumption. On the revenue side, all items impinge negatively on output growth. Additionally, our results show that public spending multiplier is positive in recessions while in expansions is smaller, inclusively, negative. Similarly, the effectiveness of the tax multiplier is, also, higher in recessions. Finally, we have found that consolidation phases affect negatively the size of multipliers.

Keywords: Fiscal policy; Fiscal multipliers; Fiscal shocks; Business-cycle fluctuations; Public debt; Euro area; VAR analysis (search for similar items in EconPapers)
JEL-codes: E32 E62 E65 H60 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2013-08
New Economics Papers: this item is included in nep-eec, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:por:fepwps:500

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