Advanced Search
MyIDEAS: Login to save this paper or follow this series

Keynesian government spending multipliers and spillovers in the Euro area

Contents:

Author Info

  • Cwik, Tobias J.
  • Wieland, Volker

Abstract

The global financial crisis has lead to a renewed interest in discretionary fiscal stimulus. Advocates of discretionary measures emphasize that government spending can stimulate additional private spending the so-called Keynesian multiplier effect. Thus, we investigate whether the discretionary spending announced by Euro area governments for 2009 and 2010 is likely to boost euro area GDP by more than one for one. Because of modeling uncertainty, it is essential that such policy evaluations be robust to alternative modeling assumptions and different parameterizations. Therefore, we use five different empirical macroeconomic models with Keynesian features such as price and wage rigidities to evaluate the impact of fiscal stimulus. Four of them suggest that the planned increase in government spending will reduce private spending for consumption and investment purposes significantly. If announced government expenditures are implemented with delay the initial effect on euro area GDP, when stimulus is most needed, may even be negative. Traditional Keynesian multiplier effects only arise in a model that ignores the forward-looking behavioral response of consumers and firms. Using a multi-country model, we find that spillovers between euro area countries are negligible or even negative, because direct demand effects are offset by the indirect effect of euro appreciation. --

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://econstor.eu/bitstream/10419/43225/1/615091520.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2009/25.

as in new window
Length:
Date of creation: 2009
Date of revision:
Handle: RePEc:zbw:cfswop:200925

Contact details of provider:
Postal: House of Finance, Grüneburgplatz 1, HPF H5, D-60323 Frankfurt am Main
Phone: +49 (0)69 798-30050
Fax: +49 (0)69 798-30077
Email:
Web page: http://www.ifk-cfs.de/
More information through EDIRC

Related research

Keywords: Fiscal Policy; Fiscal Stimulus; Government Spending Multipliers; Model Uncertainty; Crowding-out; New-Keynesian Models;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Pietro Cova & Massimiliano Pisani & Nicoletta Batini & Alessandro Rebucci, 2008. "Productivity and Global Imbalances: The Role of Nontradable Total Factor Productivity in Advanced Economies," IMF Staff Papers, Palgrave Macmillan, vol. 55(2), pages 312-325, June.
  2. Paolo Pesenti, 2008. "The Global Economy Model: Theoretical Framework," IMF Staff Papers, Palgrave Macmillan, vol. 55(2), pages 243-284, June.
  3. Coenen, Guenter & Wieland, Volker, 2003. "The Zero-Interest-Rate and the Role of the Exchange Rate for Monetary Policy in Japan," CFS Working Paper Series 2003/09, Center for Financial Studies (CFS).
  4. Kuester, Keith & Wieland, Volker, 2005. "Insurance policies for monetary policy in the euro area," Working Paper Series, European Central Bank 0480, European Central Bank.
  5. David Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 936-978.
  6. Atif Mian & Amir Sufi, 2010. "The Effects of Fiscal Stimulus: Evidence from the 2009 ‘Cash for Clunkers’ Program," NBER Working Papers 16351, National Bureau of Economic Research, Inc.
  7. J. Galí & D. López-Salido & J. Vallés, 2003. "Understanding the effects of government spending on consumption," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  8. Cogan, John F. & Cwik, Tobias J. & Taylor, John B. & Wieland, Volker, 2009. "New Keynesian versus old Keynesian government spending multipliers," CFS Working Paper Series 2009/17, Center for Financial Studies (CFS).
  9. Taylor, John B. & Wieland, Volker, 2009. "Surprising comparative properties of monetary models: Results from a new data base," CFS Working Paper Series 2009/21, Center for Financial Studies (CFS).
  10. Günter Coenen & Roland Straub, 2005. "Does Government Spending Crowd in Private Consumption? Theory and Empirical Evidence for the Euro Area," IMF Working Papers 05/159, International Monetary Fund.
  11. Volker Wieland & Maik Wolters, 2011. "The diversity of forecasts from macroeconomic models of the US economy," Economic Theory, Springer, Springer, vol. 47(2), pages 247-292, June.
  12. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland.
  13. Dieter Gerdesmeier & Barbara Roffia, 2004. "Empirical Estimates of Reaction Functions for the Euro Area," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), Swiss Society of Economics and Statistics (SSES), vol. 140(I), pages 37-66, March.
  14. Roel Beetsma & Massimo Giuliodori & Franc Klaassen, 2005. "Trade Spillovers of Fiscal Policy in the European Union: A Panel Analysis," DNB Working Papers, Netherlands Central Bank, Research Department 052, Netherlands Central Bank, Research Department.
  15. Luca Sessa & Libero Monteforte & Lorenzo Forni, 2007. "The general equilibrium effects of fiscal policy: estimates for the euro area," 2007 Meeting Papers, Society for Economic Dynamics 352, Society for Economic Dynamics.
  16. Shu-Chun S. Yang & Todd B. Walker & Eric M. Leeper, 2010. "Government Investment and Fiscal Stimulus," IMF Working Papers 10/229, International Monetary Fund.
  17. Eric M. Leeper, Todd B. Walker, And Shu-Chun S. Yang, 2009. "Government Investment And Fiscal Stimulus In The Short And Long Runs," Caepr Working Papers, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington 2009-011, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  18. Freedman, Charles & Kumhof, Michael & Laxton, Douglas & Muir, Dirk & Mursula, Susanna, 2010. "Global effects of fiscal stimulus during the crisis," Journal of Monetary Economics, Elsevier, Elsevier, vol. 57(5), pages 506-526, July.
  19. Gernot Müller & Giancarlo Corsetti & André Meier, 2009. "Fiscal Stimulus with Spending Reversals," IMF Working Papers 09/106, International Monetary Fund.
  20. Coenen, Günter & Wieland, Volker, 2003. "The zero-interest-rate bound and the role of the exchange rate for monetary policy in Japan," Working Paper Series, European Central Bank 0218, European Central Bank.
  21. Cwik, Tobias & Mueller, Gernot & Schmidt, Sebastian & Wieland, Volker & Wolters, Maik H, 2012. "A New Comparative Approach to Macroeconomic Modeling and Policy Analysis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8814, C.E.P.R. Discussion Papers.
  22. Andrew Mountford & Harald Uhlig, 2009. "What are the effects of fiscal policy shocks?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 24(6), pages 960-992.
  23. Sahm, Claudia R. & Shapiro, Matthew D. & Slemrod, Joel, 2011. "Check in the mail or more in the paycheck: does the effectiveness of fiscal stimulus depend on how it is delivered?," Working Paper Series, European Central Bank 1298, European Central Bank.
  24. Lawrence J. Christiano & Martin Eichenbaum & Sergio Rebelo, 2010. "When is the government spending multiplier large?," CQER Working Paper 2010-01, Federal Reserve Bank of Atlanta.
  25. Coenen, Günter & Orphanides, Athanasios & Wieland, Volker, 2003. "Price Stability and Monetary Policy Effectiveness when Nominal Interest Rates are Bounded at Zero," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3892, C.E.P.R. Discussion Papers.
  26. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.
  27. John F. Cogan & John B. Taylor, 2010. "What the Government Purchases Multiplier Actually Multiplied in the 2009 Stimulus Package," NBER Working Papers 16505, National Bureau of Economic Research, Inc.
  28. Jérôme Henry & Pablo Hernández de Cos & Sandro Momigliano, 2004. "The short-term impact of government budgets on prices: evidence from macroeconometrics models," Banco de Espa�a Working Papers 0418, Banco de Espa�a.
  29. António Afonso & Hans Peter Grüner & Christina Kolerus, 2010. "Fiscal Policy and Growth: Do Financial Crises make a Difference?," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2010/10, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  30. Miguel Almunia & Agustín S. Bénétrix & Barry Eichengreen & Kevin H. O'Rourke & Gisela Rua, 2009. "From Great Depression to Great Credit Crisis: Similarities, Differences and Lessons," NBER Working Papers 15524, National Bureau of Economic Research, Inc.
  31. Douglas Laxton & Michael Kumhof, 2007. "A Party without a Hangover?on the Effects of U.S. Government Deficits," IMF Working Papers 07/202, International Monetary Fund.
  32. Corsetti, Giancarlo & Meier, André & Müller, Gernot, 2009. "Cross-border spillovers from fiscal stimulus," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7535, C.E.P.R. Discussion Papers.
  33. G�nter Coenen & Christopher J. Erceg & Charles Freedman & Davide Furceri & Michael Kumhof & Ren� Lalonde & Douglas Laxton & Jesper Lind� & Annabelle Mourougane & Dirk Muir & Susanna Mursula & Ca, 2012. "Effects of Fiscal Stimulus in Structural Models," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 22-68, January.
    • Michael Kumhof & Dirk Muir & Carlos de Resende & Jan in ‘t Veld & René Lalonde & Davide Furceri & Annabelle Mourougane & John Roberts & Stephen Snudden & Mathias Trabandt & Günter Coenen &, 2010. "Effects of Fiscal Stimulus in Structural Models," IMF Working Papers 10/73, International Monetary Fund.
  34. Bodenstein, Martin & Erceg, Christopher & Guerrieri, Luca, 2010. "The Effects of Foreign Shocks When Interest Rates Are at Zero," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8006, C.E.P.R. Discussion Papers.
  35. Burnside, Craig & Eichenbaum, Martin & Fisher, Jonas D. M., 2004. "Fiscal shocks and their consequences," Journal of Economic Theory, Elsevier, Elsevier, vol. 115(1), pages 89-117, March.
  36. Fagan, Gabriel & Henry, Jerome & Mestre, Ricardo, 2005. "An area-wide model for the euro area," Economic Modelling, Elsevier, Elsevier, vol. 22(1), pages 39-59, January.
  37. Hamid Faruqee & Douglas Laxton & Bart Turtelboom & Peter Isard & Eswar Prasad, 1998. "Multimod Mark III," IMF Occasional Papers 164, International Monetary Fund.
  38. Laxton, Douglas & Pesenti, Paolo, 2003. "Monetary rules for small, open, emerging economies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(5), pages 1109-1146, July.
  39. Christoffel, Kai & Coenen, Günter & Warne, Anders, 2008. "The New Area-Wide Model of the euro area: a micro-founded open-economy model for forecasting and policy analysis," Working Paper Series, European Central Bank 0944, European Central Bank.
  40. Ratto, Marco & Roeger, Werner & Veld, Jan in 't, 2009. "QUEST III: An estimated open-economy DSGE model of the euro area with fiscal and monetary policy," Economic Modelling, Elsevier, Elsevier, vol. 26(1), pages 222-233, January.
  41. Dieppe, Alistair & Kuester, Keith & McAdam, Peter, 2004. "Optimal monetary policy rules for the euro area: an analysis using the area wide model," Working Paper Series, European Central Bank 0360, European Central Bank.
  42. Fair, Ray C & Taylor, John B, 1983. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 1169-85, July.
  43. Juillard, Michel, 1996. "Dynare : a program for the resolution and simulation of dynamic models with forward variables through the use of a relaxation algorithm," CEPREMAP Working Papers (Couverture Orange) 9602, CEPREMAP.
  44. Valerie A. Ramey & Matthew D. Shapiro, 1999. "Costly Capital Reallocation and the Effects of Government Spending," NBER Working Papers 6283, National Bureau of Economic Research, Inc.
  45. Werner Roeger & Jan in 't Veld, 2009. "Fiscal policy with credit constrained households," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 357, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  46. Giancarlo Corsetti & André Meier & Gernot J. Müller, 2012. "Fiscal Stimulus with Spending Reversals," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 878-895, November.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:zbw:cfswop:200925. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.