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The Effects of Government Spending in the Eurozone

Author

Listed:
  • Ricardo Duque Gabriel
  • Mathias Klein
  • Ana Sofia Pessoa

Abstract

Using a newly assembled rich dataset at the regional level, this paper provides novel empirical evidence on the effects of fiscal policy in the Eurozone. Our baseline estimates reveal a government spending relative output multiplier around 2, an employment multiplier of 1.4, and a cost per job created of approximately €30,000. Moreover, we find that a regional fiscal stimulus leads to a significant increase in private investment, productivity, and durable consumption. The labor share also increases, as do total hours worked driven by changes in the extensive margin (total employment), whereas the intensive margin (hours per worker) barely reacts. Contrary to the common policy narrative of strong positive spillover effects, we estimate only small regional fiscal spillovers. Finally, our findings reveal strong heterogeneities across economic sectors, states of the economy, and member states.

Suggested Citation

  • Ricardo Duque Gabriel & Mathias Klein & Ana Sofia Pessoa, 2023. "The Effects of Government Spending in the Eurozone," Journal of the European Economic Association, European Economic Association, vol. 21(4), pages 1397-1427.
    • Handle: RePEc:oup:jeurec:v:21:y:2023:i:4:p:1397-1427.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvad006
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    Citations

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    Cited by:

    1. Lyytikäinen, Teemu & Ramboer, Sander & Toikka, Max, 2024. "Fiscal transfers to local governments and the distribution of economic activity," Working Papers 171, VATT Institute for Economic Research.
    2. Julie Ann Q. Basconcillo, 2023. "A nexus between fiscal policy and inflation: a case study of Indonesia using SVAR model," Public Sector Economics, Institute of Public Finance, vol. 47(4), pages 477-503.
    3. Fiuratti, Federico & Nikolova, Desislava & Pennings, Steven & Schiffbauer, Marc, 2025. "Are regional fiscal multipliers on EU structural and investment fund spending large? A reassessment of the evidence," Journal of Macroeconomics, Elsevier, vol. 85(C).
    4. Sabaj, Ernil & Sbia, Rashid & Troug, Haytem, 2023. "Does it matter where and how governments spend?," Economics Letters, Elsevier, vol. 228(C).
    5. Antonia Lopez Villavicencio & Hugo Oriola, 2025. "National elections and sub-national electoral cycles: Do strong fiscal rules matter in Europe?," Working Papers hal-05002552, HAL.
    6. Gabriel, Ricardo Duque, 2024. "The Credit Channel of Public Procurement," Journal of Monetary Economics, Elsevier, vol. 147(S).
    7. Beetsma, Roel & Cimadomo, Jacopo & van Spronsen, Josha, 2024. "One scheme fits all: A central fiscal capacity for the EMU targeting eurozone, national and regional shocks," European Economic Review, Elsevier, vol. 165(C).
    8. Potrafke, Niklas, 2025. "The economic consequences of fiscal rules," Journal of International Money and Finance, Elsevier, vol. 153(C).

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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