Public Debt and state-dependent Effects of Fiscal Policy in the Euro Area

Snezana Eminidou, Martin Geiger and Marios Zachariadis

University of Cyprus Working Papers in Economics from University of Cyprus Department of Economics

Abstract: We investigate public debt related state dependencies in the impact of fiscal policy shocks on the macroeconomy for a panel of fifteen euro area economies during the period from 2000:Q1 to 2019:Q4. Our estimated impulse response functions suggest that the impact of fiscal policy shocks varies depending on the level of public debt characterizing an economy. We observe that differences in the time-serial as well as in the cross-sectional dimension play an important role driving the impact of fiscal policy. In the high-debt cross sectional state, output, consumption and inflation, as well as consumption intentions and inflation expectations, go up in response to a positive government spending shock, and these responses are distinctly different from those in the low-debt state. Using an extended model that considers simultaneously time-serial and cross-sectional high- and low-debt states, our results suggest that cross-sectional debt variation is more important in driving cross-country differences in the responses to expenditure shocks across the euro area.

Keywords: government spending; shock; debt-to-gdp; output; consumption; inflation; credit constraints; expectations (search for similar items in EconPapers)
JEL-codes: E3 E62 H3 H63 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2021-05
New Economics Papers: this item is included in nep-eec, nep-mac and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Public debt and state-dependent effects of fiscal policy in the euro area (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ucy:cypeua:03-2021

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