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Changing Patterns of Domestic and Cross-Border Fiscal Policy Multipliers in Europe and the US

Agnès Benassy-Quere () and Jacopo Cimadomo ()

Working Papers from CEPII research center

Abstract: This paper documents time variation in domestic fiscal policy multipliers in Germany, the UK and the US, and in cross-border fiscal spillovers from Germany to the seven largest European Union economies. We propose two VAR models which incorporate three “global factors” representing developments in the world economy, and we combine them with identification of fiscal shocks à la Blanchard and Perotti (2002) and Perotti (2005), to study the effects of net tax and government spending shocks on GDP, inflation and interest rates. By recursively estimating these models on different samples of data, we find that the domestic impact of tax shocks has been positive but vanishing for Germany and the US, stably not significant for the UK. Financial markets deregulations may play an important role in that since they allow households to be less dependent on disposable income and to smooth more easily consumption. Domestic government spending multipliers are found to be positive but feeble in the short-run and close to zero or slightly negative in the medium-run, implying that private consumption and investments might be crowded out. These results suggest that, in the European Monetary Union, discretionary fiscal policy “surprises” (i.e. unexpected tax cuts and government spending expansions) cannot be used by governments as substitutes for lost national monetary instruments, since they have shown to be progressively ineffective over time. Finally, we find that fiscal expansions in Germany have had beneficial (though declining) effects for neighboring countries, especially the smaller ones. This may indicate that the trade channel of transmission of fiscal policy dominates the interest rate one.

Keywords: Fiscal policy effectiveness; fiscal shocks; spillovers; factor-augmented VAR; Great Moderation (search for similar items in EconPapers)
JEL-codes: E30 E61 E62 (search for similar items in EconPapers)
Date: 2006-12
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
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Persistent link: https://EconPapers.repec.org/RePEc:cii:cepidt:2006-24

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