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Transmission of government spending shocks in the euro area: Time variation and driving forces

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  • Kirchner, Markus
  • Cimadomo, Jacopo
  • Hauptmeier, Sebastian

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. JEL Classification: C32, E62, H30, H50

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1219.

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Date of creation: Jul 2010
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Handle: RePEc:ecb:ecbwps:20101219

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Related research

Keywords: Fiscal transmission mechanism; Government spending shocks; Structural change; Structural vector autoregressions; Time-varying parameter models;

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  1. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2009. "Government Investment and Fiscal Stimulus in the Short and Long Runs," NBER Working Papers 15153, National Bureau of Economic Research, Inc.
  2. Roberto Perotti, 2007. "In Search of the Transmission Mechanism of Fiscal Policy," NBER Working Papers 13143, National Bureau of Economic Research, Inc.
  3. Gambetti, Luca & D’Agostino, Antonello & Giannone, Domenico, 2010. "Macroeconomic forecasting and structural change," Working Paper Series 1167, European Central Bank.
  4. Agnès Bénassy-Quéré & Jacopo Cimadomo, 2006. "Changing Patterns of Domestic and Cross-Border Fiscal Policy Multipliers in Europe and the US," Working Papers 2006-24, CEPII research center.
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