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Public debt and state-dependent effects of fiscal policy in the euro area

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  • Eminidou, Snezana
  • Geiger, Martin
  • Zachariadis, Marios

Abstract

We investigate public debt related state dependencies of fiscal policy shocks for 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. Macroeconomic variables, notably output and consumption, go up in response to a positive government spending shock in the high-debt cross-sectional state, and these responses are distinctly different from those in the low-debt state. Using an extended model that considers both cross-sectional and time-serial high- and low-debt states we find that, for euro area economies, cross-sectional debt variation is more important than time-serial debt variation in driving differences in the responses of macroeconomic variables to government spending shocks.

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  • Eminidou, Snezana & Geiger, Martin & Zachariadis, Marios, 2023. "Public debt and state-dependent effects of fiscal policy in the euro area," Journal of International Money and Finance, Elsevier, vol. 130(C).
  • Handle: RePEc:eee:jimfin:v:130:y:2023:i:c:s0261560622001498
    DOI: 10.1016/j.jimonfin.2022.102746
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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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