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

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  • Snezana Eminidou
  • Martin Geiger
  • Marios Zachariadis

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.

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  • Snezana Eminidou & Martin Geiger & Marios Zachariadis, 2021. "Public Debt and state-dependent Effects of Fiscal Policy in the Euro Area," University of Cyprus Working Papers in Economics 03-2021, University of Cyprus Department of Economics.
    • Handle: RePEc:ucy:cypeua:03-2021
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    1. Casalin, Fabrizio & Cerniglia, Floriana & Dia, Enzo, 2023. "Stock-flow adjustments, public debt management and interest costs," Economic Modelling, Elsevier, vol. 129(C).

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    More about this item

    Keywords

    government spending; shock; debt-to-gdp; output; consumption; inflation; credit constraints; expectations;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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