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On the usefulness of government spending in the EU area

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  • Marattin, Luigi
  • Salotti, Simone

Abstract

This paper investigates the effects of government spending on private consumption and investment in the European Union (EU). A certain consensus has been reached on the expansionary Keynesian effects of fiscal impulses on the economic activity. However, the existing empirical literature has concentrated on few countries, mostly outside the EU. We check the validity of this result for the EU area using annual data and a panel vector auto-regression approach, with particular attention being paid to robustness across alternative identification assumptions based on Cholesky orderings. Our results show that shocks to public spending positively affect private consumption and investment. According to our baseline estimate, a 1% increase in public current expenditure produces a 0.24% impact rise in private consumption, and a 0.41% impact rise in private investment. The effects are substantial, and die out slowly in the case of private consumption (the cumulative impact amounts to +0.56% after 3years), but much faster in the case of private investment. A further disaggregation between wage and non-wage components reveals that public salaries have a relatively stronger stimulating role. This is not due to the different weights on GDP of the two components, which have comparable values in our sample.

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  • Marattin, Luigi & Salotti, Simone, 2011. "On the usefulness of government spending in the EU area," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 40(6), pages 780-795.
  • Handle: RePEc:eee:soceco:v:40:y:2011:i:6:p:780-795
    DOI: 10.1016/j.socec.2011.08.018
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    2. Membreño, Luis & López, Jennifer & Jiménez, Kenneth, 2020. "Estimación de multiplicadores fiscales para Nicaragua con datos trimestrales de 2006 a 2018 [Estimation of fiscal multipliers for Nicaragua with quarterly data from 2006 to 2018]," MPRA Paper 105132, University Library of Munich, Germany, revised 30 Dec 2020.
    3. Dreger, Christian & Reimers, Hans-Eggert, 2014. "On the relationship between public and private investment in the euro area," Discussion Papers 344, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
    4. L. Marattin & M. Marzo, 2010. "The Multiplier-Effects of Non-Wasteful Government Expenditure," Working Papers 704, Dipartimento Scienze Economiche, Universita' di Bologna.
    5. Fisayo Fagbemi & Olufemi Solomon Olatunde, 2019. "Domestic Investment in Africa: Why the Emerging Public Debt Spiral Matters?," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 11(2), pages 91-101, December.
    6. Fisayo Fagbemi & Opeoluwa A. Adeosun, 2020. "Public Debt-Investment Nexus: the Significance of Investment-Generation Policy in West Africa," Working Papers of the African Governance and Development Institute. 20/083, African Governance and Development Institute..
    7. Iszan Hana Kaharudin & Mohammad Syuhaimi Ab-Rahman, 2022. "Fiscal Policy Effects on Private Expenditure for Sustainable Economic Growth: A Panel VAR Study from Selected Developing Countries," Sustainability, MDPI, vol. 14(17), pages 1-21, August.
    8. Dreger, Christian & Reimers, Hans-Eggert, 2016. "Does public investment stimulate private investment? Evidence for the euro area," Economic Modelling, Elsevier, vol. 58(C), pages 154-158.
    9. Fisayo Fagbemi & Opeoluwa A. Adeosun, 2020. "Public Debt-Investment Nexus: the Significance of Investment-Generation Policy in West Africa," Working Papers 20/083, European Xtramile Centre of African Studies (EXCAS).
    10. Membreño, Luis & López, Jennifer & Jiménez, Kenneth, 2020. "Estimación de multiplicadores fiscales para Nicaragua con datos trimestrales de 2006 a 2018 [Estimation of fiscal multipliers for Nicaragua with quarterly data from 2006 to 2018]," MPRA Paper 105040, University Library of Munich, Germany, revised 28 Dec 2020.
    11. Barbara Annicchiarico & Claudio Battiati & Claudio Cesaroni & Fabio Di Dio & Francesco Felici, 2017. "IGEM-PA: a Variant of the Italian General Equilibrium Model for Policy Analysis," Working Papers 2, Department of the Treasury, Ministry of the Economy and of Finance.

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    More about this item

    Keywords

    Fiscal policy; Private consumption; Panel vector autoregression;
    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
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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