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The euro-area government spending multiplier at the effective lower bound

Adalgiso Amendola, Mario Di Serio, Matteo Fragetta () and Giovanni Melina ()

European Economic Review, 2020, vol. 127, issue C

Abstract: We build a factor-augmented interacted panel vector-autoregressive model of the Euro Area (EA) and estimate it with Bayesian methods to compute government spending multipliers. The multipliers are contingent on the overall monetary policy stance, captured by a shadow monetary policy rate. Whether the fiscal shock occurs when the economy is at the effective lower bound (ELB) or in normal times matters for the size of the multiplier. Median estimates vary conditional on the specification, but the difference between multipliers at the ELB and in normal times is systematically positive with very high probability. Over the medium run (5 years), median cumulated multipliers range between 0.3 and 1.4 in normal times, and between 1.6 and 2.9 at the ELB. We show that the results are not driven by the state of the business cycle and that the multiplier is inversely correlated with the level of the shadow monetary policy rate. The econometric approach deals with several technical problems highlighted in the empirical macroeconomic literature, including the issues of fiscal foresight and limited information.

Keywords: Fiscal multiplier; Zero lower bound; Panel VAR; Factor models; Euro area (search for similar items in EconPapers)
JEL-codes: C32 C33 C38 E62 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:127:y:2020:i:c:s0014292120301124

DOI: 10.1016/j.euroecorev.2020.103480

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