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In Search of the Transmission Mechanism of Fiscal Policy in the Euro Area

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  • P. Fève
  • J.-G. Sahuc

Abstract

This paper applies the DSGE-VAR methodology to assess the size of fiscal multipliers in the data and the relative contributions of two transmission mechanisms of government spending shocks, namely hand-to-mouth consumers and Edgeworth complementarity. Econometric experiments show that a DSGE model with Edgeworth complementarity is a better representation of the transmission mechanism of fiscal policy as it yields dynamic responses close to those obtained with the flexible DSGE-VAR model (i.e. an impact output multiplier larger than one and a crowding-in of private consumption). The estimated share of hand-to-mouth consumers is too small to replicate the positive response of private consumption.

Suggested Citation

  • P. Fève & J.-G. Sahuc, 2016. "In Search of the Transmission Mechanism of Fiscal Policy in the Euro Area," Working papers 585, Banque de France.
    • Handle: RePEc:bfr:banfra:585
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    2. Georgiadis, Georgios & Jančoková, Martina, 2020. "Financial globalisation, monetary policy spillovers and macro-modelling: Tales from 1001 shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 121(C).
    3. Albonico, Alice & Paccagnini, Alessia & Tirelli, Patrizio, 2017. "Great recession, slow recovery and muted fiscal policies in the US," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 140-161.
    4. Gerke, Rafael & Giesen, Sebastian & Scheer, Alexander, 2020. "The power of forward guidance in a quantitative TANK model," Economics Letters, Elsevier, vol. 186(C).
    5. Böhl, Gregor & Strobel, Felix, 2020. "US business cycle dynamics at the zero lower bound," IMFS Working Paper Series 143, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    6. Sayed O. M. Timuno & Joel Hinaunye Eita & Lanouar Charfeddine, 2020. "Towards an effective fiscal stimulus: Evidence from Botswana," Cogent Economics & Finance, Taylor & Francis Journals, vol. 8(1), pages 1790948-179, January.
    7. Cristiano Cantore & Filippo Ferroni & Miguel León-Ledesma, 2021. "The Missing Link: Monetary Policy and The Labor Share," Journal of the European Economic Association, European Economic Association, vol. 19(3), pages 1592-1620.
    8. Bonam, Dennis & Ciccarelli, Matteo & Gomes, Sandra & Aldama, Pierre & Bańkowski, Krzysztof & Buss, Ginters & da Costa, José Cardoso & Christoffel, Kai & Elfsbacka Schmöller, Michaela & Jacquinot, Pasc, 2024. "Challenges for monetary and fiscal policy interactions in the post-pandemic era," Occasional Paper Series 337, European Central Bank.
    9. Eric Jondeau & Grégory Levieuge & Jean-Guillaume Sahuc & Gauthier Vermandel, 2022. "Environmental Subsidies to Mitigate Transition risk," Working Papers hal-04159804, HAL.
    10. Carmignani, Fabrizio, 2022. "The electoral fiscal multiplier," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 938-945.
    11. Gerke, Rafael & Kienzler, Daniel & Scheer, Alexander, 2022. "On the macroeconomic effects of reinvestments in asset purchase programmes," Discussion Papers 47/2022, Deutsche Bundesbank.

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    More about this item

    Keywords

    Fiscal multipliers; hand-to-mouth; Edgeworth complementarity; DSGE-VAR; Euro area; Bayesian econometrics.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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