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Transmission of Government Spending Shocks in the Euro Area: Time Variation and Driving Forces

Markus Kirchner (), Jacopo Cimadomo () and Sebastian Hauptmeier
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Sebastian Hauptmeier: European Central Bank

No 10-021/2, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This paper provides new evidence on the effects of government spending shocks and the fiscal transmission mechanism in the euro area for the period 1980-2008. Our contribution is two-fold. First, we investigate changes in the macroeconomic impact of government spending shocks using time-varying structural VAR techniques. The results show that the short-run effectiveness of government spending in stabilizing real GDP and private consumption has increased until the end-1980s but it has decreased thereafter. Moreover, government spending multipliers at longer horizons have declined substantially over the sample period. We also observe a weaker response of real wages and a stronger response of the nominal interest rate to spending shocks. Second, we provide econometric evidence on the driving forces behind the observed time variation of spending multipliers. We find that a higher ratio of credit to households over GDP, a smaller share of government investment and a larger share of public wages over total government spending have led to decreasing contemporaneous multipliers. At the same time, our results indicate that higher government debt-to-GDP ratios have negatively affected long-term multipliers.

Keywords: Government spending shocks; Fiscal transmission mechanism; Structural change; Bayesian analysis; Structural vector autoregressions; Time-varying parameter models (search for similar items in EconPapers)
JEL-codes: C32 E62 H30 H50 (search for similar items in EconPapers)
Date: 2010-02-12
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Working Paper: Transmission of government spending shocks in the euro area: Time variation and driving forces (2010) Downloads
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