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When does it pay to tax? Evidence from state-dependent fiscal multipliers in the euro area

George Hondroyiannis () and Dimitrios Papaoikonomou ()

No 187, Working Papers from Bank of Greece

Abstract: The impact of fiscal policy on economic growth is investigated within a panel of euro area member states over the period 2004-2011. We mainly consider fiscal impulses identified by (a) changes in the structural primary balance, complemented by evidence from (b) the IMF narrative shocks developed by Devries et al (2011) and (c) a VAR-based measure of unanticipated policy announcements. Aggregate fiscal multipliers are estimated in the region of 0.5, although we find considerable variation depending on the fiscal mix, the degree of openness and the state of the economy. During episodes of recession, tax hikes become significantly more costly in terms of output than expenditure cuts. This appears to be related to increases in the share of hand-to-mouth consumers, proxied by the unemployment rate. Fiscal effects are generally more muted in open economies and during periods of positive growth. Country-specific features in Greece lead to significantly higher estimates, possibly in excess of unity in 2011, reflecting predominantly sizeable revenue effects.

Keywords: Fiscal multipliers; state-dependence; euro area (search for similar items in EconPapers)
JEL-codes: E62 H22 H50 (search for similar items in EconPapers)
Pages: 27
Date: 2014-10
New Economics Papers: this item is included in nep-eec, nep-mac and nep-pbe
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