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Gauging the effects of fiscal stimulus packages in the Euro area

Listed author(s):
  • Gunter Coenen
  • Roland Straub
  • Mathias Trabandt

We seek to quantify the impact on euro area GDP of the European Economic Recovery Plan (EERP) enacted in response to the financial crisis of 2008-09. To do so, we estimate an extended version of the ECB’s New Area-Wide Model with a richly specified fiscal sector. The estimation results point to the existence of important complementarities between private and government consumption and, to a lesser extent, between private and public capital. We first examine the implied present-value multipliers for seven distinct fiscal instruments and show that the estimated complementarities result in fiscal multipliers larger than one for government consumption and investment. We highlight the importance of monetary accommodation for these findings. We then show that the EERP, if implemented as initially enacted, had a sizeable, although short-lived impact on euro area GDP. Since the EERP comprised both revenue and expenditure-based fiscal stimulus measures, the total multiplier is below unity.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1061.

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Date of creation: 2012
Handle: RePEc:fip:fedgif:1061
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  1. Thorsten Drautzburg & Harald Uhlig, 2011. "Fiscal Stimulus and Distortionary Taxation," 2011 Meeting Papers 481, Society for Economic Dynamics.
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  7. Woodford, Michael, 2010. "Simple Analytics of the Government Expenditure Multiplier," CEPR Discussion Papers 7704, C.E.P.R. Discussion Papers.
  8. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
  9. Günter Coenen & Roland Straub, 2005. "Does Government Spending Crowd in Private Consumption? Theory and Empirical Evidence for the Euro Area," International Finance, Wiley Blackwell, vol. 8(3), pages 435-470, December.
  10. Coenen, Günter & McAdam, Peter & Straub, Roland, 2008. "Tax reform and labour-market performance in the euro area: A simulation-based analysis using the New Area-Wide Model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2543-2583, August.
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  18. Cogan, John F. & Cwik, Tobias J. & Taylor, John B. & Wieland, Volker, 2009. "New Keynesian versus old Keynesian government spending multipliers," CFS Working Paper Series 2009/17, Center for Financial Studies (CFS).
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  22. Christoffel, Kai & Coenen, Günter & Warne, Anders, 2008. "The New Area-Wide Model of the euro area: a micro-founded open-economy model for forecasting and policy analysis," Working Paper Series 0944, European Central Bank.
  23. Lorenzo Forni & Libero Monteforte & Luca Sessa, 2007. "The general equilibrium effects of fiscal policy: estimates for the euro area," Temi di discussione (Economic working papers) 652, Bank of Italy, Economic Research and International Relations Area.
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  34. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models—Rejoinder," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 211-219.
  35. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
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  39. Harald Uhlig, 2010. "Some Fiscal Calculus," American Economic Review, American Economic Association, vol. 100(2), pages 30-34, May.
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