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In Search of the Transmission Mechanism of Fiscal Policy in the Euro Area

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  • P. Fève
  • J.-G. Sahuc

Abstract

This paper applies the DSGE-VAR methodology to assess the size of fiscal multipliers in the data and the relative contributions of two transmission mechanisms of government spending shocks, namely hand-to-mouth consumers and Edgeworth complementarity. Econometric experiments show that a DSGE model with Edgeworth complementarity is a better representation of the transmission mechanism of fiscal policy as it yields dynamic responses close to those obtained with the flexible DSGE-VAR model (i.e. an impact output multiplier larger than one and a crowding-in of private consumption). The estimated share of hand-to-mouth consumers is too small to replicate the positive response of private consumption.

Suggested Citation

  • P. Fève & J.-G. Sahuc, 2016. "In Search of the Transmission Mechanism of Fiscal Policy in the Euro Area," Working papers 585, Banque de France.
  • Handle: RePEc:bfr:banfra:585
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    More about this item

    Keywords

    Fiscal multipliers; hand-to-mouth; Edgeworth complementarity; DSGE-VAR; Euro area; Bayesian econometrics.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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

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