Green Fiscal Multipliers with Different Sovereign Debt Trajectories in EU Countries

Antonio Afonso, José Alves, Alessio Ferraro and Sofia Monteiro

No 2025/0389, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: This paper estimates the fiscal multipliers of green public spending using a linear Bayesian Panel VAR and a Smooth Transition VAR framework, with quarterly data for the period 1995Q1–2022Q4 for EU member states. We group EU member states based on similarities in debt trajectories and green spending intensity, forming three regional aggregates: Southern Europe, Eastern Europe, and Northern Europe. Our results show that green spending multipliers on GDP are generally below one, but the response of private investment is significantly stronger — particularly in Southern and Eastern Europe. Multipliers tend to be larger in periods of high public debt, suggesting that green fiscal expansions may be more effective during downturns. Another key finding is that in response to green spending shocks, both long-term interest rates and public debt tend to decline—especially in high-debt regimes—indicating improved market expectations about fiscal sustainability. In contrast, when we estimate the effects of a shock to total public spending net of green spending, we find that both interest rates and debt increase. This suggests that economic agents perceive green spending more favorably than undifferentiated fiscal expansions, likely due to its role in mitigating climate risks, lowering long-term energy costs, and signaling credible long-term policy commitments.

Keywords: green fiscal multipliers; debt trajectories; interest rates; Bayesian Panel Vector Autoregression (BVAR). (search for similar items in EconPapers)
JEL-codes: C23 E44 E62 G15 H62 H63 (search for similar items in EconPapers)
Date: 2025-07
New Economics Papers: this item is included in nep-eec and nep-env
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Working Paper: Green Fiscal Multipliers with Different Sovereign Debt Trajectories in EU Countries (2025)
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