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Aggregate Tax and Spending Multipliers in a Monetary Union

Author

Listed:
  • Gökhan Ider
  • Malte Rieth

Abstract

We examine the aggregate effects of government spending and tax changes in a monetary union. We show theoretically that government consumption and government investment shocks have multipliers above 1, and consumption tax and income tax shocks have multipliers below 1. We test the predictions on quarterly euro area data, identifying the four fiscal shocks in a panel structural vector autoregression through time fixed effects and cross-country heteroskedasticity. Both spending shocks have multipliers above 1, and both tax shocks have multipliers below 1. The analysis suggests that spending policy stabilizes output more efficiently than tax policy in a monetary union.

Suggested Citation

  • Gökhan Ider & Malte Rieth, 2026. "Aggregate Tax and Spending Multipliers in a Monetary Union," Discussion Papers of DIW Berlin 2170, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp2170
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    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
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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