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When does it pay to tax? Evidence from state-dependent fiscal multipliers in the euro area

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  • Hondroyiannis, George
  • Papaoikonomou, Dimitrios

Abstract

The impact of fiscal policy on economic growth is investigated within a panel of euro area member states over the period 2004–2011. We mainly consider fiscal impulses identified by (a) changes in the structural primary balance, complemented by evidence from (b) the IMF narrative shocks developed by Devries et al. (2011) and (c) a VAR-based measure of unanticipated policy announcements. Aggregate fiscal multipliers are estimated in the region of 0.5, although we find considerable variation depending on the fiscal mix, the degree of openness and the state of the economy. During episodes of recession, tax hikes become significantly more costly in terms of output than expenditure cuts. This appears to be related to increases in the share of hand-to-mouth consumers, proxied by the unemployment rate. Fiscal effects are generally more muted in open economies and during periods of positive growth. Country-specific features in Greece lead to significantly higher estimates, possibly in excess of unity in 2011, reflecting predominantly sizeable revenue effects.

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  • Hondroyiannis, George & Papaoikonomou, Dimitrios, 2015. "When does it pay to tax? Evidence from state-dependent fiscal multipliers in the euro area," Economic Modelling, Elsevier, vol. 48(C), pages 116-128.
    • Handle: RePEc:eee:ecmode:v:48:y:2015:i:c:p:116-128
    DOI: 10.1016/j.econmod.2014.10.031
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    2. Landon, Stuart & Smith, Constance, 2017. "Does the design of a fiscal rule matter for welfare?," Economic Modelling, Elsevier, vol. 63(C), pages 226-237.
    3. Elias Soukiazis & Micaela Antunes & Ioannis Kostakis, 2018. "The Greek economy under the twin-deficit pressure: a demand orientated growth approach," International Review of Applied Economics, Taylor & Francis Journals, vol. 32(2), pages 215-236, March.
    4. van der Wielen, Wouter, 2020. "The macroeconomic effects of tax changes: Evidence using real-time data for the European Union," Economic Modelling, Elsevier, vol. 90(C), pages 302-321.
    5. Angelika Knollmayer & Aleksandra Riedl & Maria Antoinette Silgoner, 2015. "The mixed success of EU-IMF adjustment programs in Europe – why Greece was different," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 52-70.
    6. repec:ecb:ecbops:2011162 is not listed on IDEAS
    7. Cavallari, Lilia & Romano, Simone, 2017. "Fiscal policy in Europe: The importance of making it predictable," Economic Modelling, Elsevier, vol. 60(C), pages 81-97.
    8. Ioannis Kostakis, 2017. "The impact of shadow economy and/or corruption on private consumption: further evidence from selected Eurozone economies," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 7(3), pages 411-434, December.
    9. Rother, Philipp & Cugnasca, Alessandro, 2015. "Fiscal multipliers during consolidation: evidence from the European Union," Working Paper Series 1863, European Central Bank.
    10. Mencinger, Jernej & Aristovnik, Aleksander & Verbič, Miroslav, 2017. "Asymmetric effects of fiscal policy in EU and OECD countries," Economic Modelling, Elsevier, vol. 61(C), pages 448-461.

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    More about this item

    Keywords

    Fiscal multipliers; State-dependence; Euro area;
    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
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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