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The Effects of Government Purchases Shocks: Review and Estimates for the EU

In this article, we review the theoretical consequences of government purchases shocks for both closed and open economies, followed by a discussion of the empirical literature. Next, we provide our own estimates for the EU countries. We find that an increase in government purchases raises output, consumption and investment and reduces the trade balance. However, the stimulating effect is weaker and the trade balance reduction is larger for the more open EU economies, consistent with larger leakage effects. Further, we show that government purchases shocks in large EU economies have non-negligible consequences for economic activity in the main trading partners.

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File URL: http://hdl.handle.net/10.1111/j.1468-0297.2010.02413.x
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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 121 (2011)
Issue (Month): 550 (February)
Pages: F4-F32

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Handle: RePEc:ecj:econjl:v:121:y:2011:i:550:p:f4-f32
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  8. Pablo Burriel & Francisco de Castro & Daniel Garrote & Esther Gordo & Joan Paredes & Javier J. Pérez, 2009. "Fiscal policy shocks in the euro area and the US: an empirical assessment," Banco de Espa�a Working Papers 0930, Banco de Espa�a.
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  14. Benjamin Born & Gernot J. Müller, 2009. "Government Spending Shocks in Quarterly and Annual U.S. Time-Series," Bonn Econ Discussion Papers bgse16_2009, University of Bonn, Germany.
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  16. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2008. "Fiscal Foresight: Analytics and Econometrics," Caepr Working Papers 2008-013, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  17. Beetsma, Roel & Giuliodori, Massimo & Klaassen, Franc, 2009. "Temporal aggregation and SVAR identification, with an application to fiscal policy," Economics Letters, Elsevier, vol. 105(3), pages 253-255, December.
  18. Karel Mertens & MortenO. Ravn, 2010. "Measuring the Impact of Fiscal Policy in the Face of Anticipation: A Structural VAR Approach," Economic Journal, Royal Economic Society, vol. 120(544), pages 393-413, 05.
  19. Mario Forni & Luca Gambetti, 2010. "Fiscal Foresight and the Effects of Government Spending," Working Papers 460, Barcelona Graduate School of Economics.
  20. Alberto Alesina & Silvia Ardagna & Roberto Perotti & Fabio Schiantarelli, 2000. "Fiscal Policy, Profits, and Investment," Boston College Working Papers in Economics 504, Boston College Department of Economics.
  21. Corsetti, Giancarlo & Meier, André & Müller, Gernot, 2012. "What Determines Government Spending Multipliers?," CEPR Discussion Papers 9010, C.E.P.R. Discussion Papers.
  22. Ravn, Morten O & Schmitt-Grohé, Stephanie & Uribe, Martín, 2007. "Explaining the Effects of Government Spending Shocks on Consumption and the Real Exchange Rate," CEPR Discussion Papers 6541, C.E.P.R. Discussion Papers.
  23. Roel Beetsma & Massimo Giuliodori & Peter Wierts, 2009. "Planning to cheat: EU fiscal policy in real time," Economic Policy, CEPR;CES;MSH, vol. 24, pages 753-804, October.
  24. Devereux, Michael B & Head, Allen C & Lapham, Beverly J, 1996. "Monopolistic Competition, Increasing Returns, and the Effects of Government Spending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 233-54, May.
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