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Changing Patterns of Fiscal Policy Multipliers in Germany, the UK and the US

Author

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  • Jacopo Cimadomo

    (CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique, European Central Bank - ECB)

  • Agnès Bénassy-Quéré

    (CES - Centre d'économie de la Sorbonne - CNRS - Centre National de la Recherche Scientifique - UP1 - Université Panthéon-Sorbonne, PSE - Paris School of Economics, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique)

Abstract

This paper documents time variation in fiscal policy multipliers in Germany, the UK and the US over the period 1971-2009. The analysis is based on a quarterly vector autoregression (VAR) model. For the German and the UK cases, the VAR is augmented by "global factors" representing developments in the world economy. By estimating these models on different samples of data, our evidence indicates that fiscal multipliers have substantially changed over time, often in a non-monotonic way. In particular, for Germany, the net tax multiplier is found to follow a humped-shaped curve, peaking in the middle of the 1990s, declining thereafter, before rising again during the recent 2008-2009 crisis. Government spending shocks are found to be more powerful to stimulate output after the reunification. We show that significant crowding-in effects for private investments contribute to explain this finding. For the UK, we observe large variations in fiscal multipliers over the period, with non-Keynesian developments during the fiscal consolidation period of the 1980s. After that, British multipliers are low and only pick up at the very end of the sample, when the 2008-2009 crisis is included in the analysis. For the US, short-run multipliers appear to be broadly stable over the period, but medium-run multipliers tend to decline, in particular in the end of the 1980s and in the 1990s. This can be due to the large fiscal imbalances over this period that may have triggered Ricardian effects, before a fiscal surplus was achieved at the end of the 1990s.

Suggested Citation

  • Jacopo Cimadomo & Agnès Bénassy-Quéré, 2012. "Changing Patterns of Fiscal Policy Multipliers in Germany, the UK and the US," PSE - Labex "OSE-Ouvrir la Science Economique" hal-00966144, HAL.
  • Handle: RePEc:hal:pseose:hal-00966144
    DOI: 10.1016/j.jmacro.2012.02.006
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00966144
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    Cited by:

    1. James Foreman-Peck, 2014. "Great recessions compared," Investigaciones de Historia Económica (IHE) Journal of the Spanish Economic History Association, Asociacion Espa–ola de Historia Economica, vol. 10(02), pages 92-103.
    2. Bilge Erten, 2012. "Macroeconomic Transmission of Eurozone Shocks to Emerging Economies," International Economics, CEPII research center, issue 131, pages 43-70.
    3. Jacopo Cimadomo & Antonello D'Agostino, 2016. "Combining Time Variation and Mixed Frequencies: an Analysis of Government Spending Multipliers in Italy," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(7), pages 1276-1290, November.
    4. Lalik, Magdalena, 2017. "Interactions between fiscal multipliers and sovereign risk premium during fiscal consolidation: model based assessment for the euro area," Working Paper Series 2016, European Central Bank.
    5. repec:sos:sosjrn:170406 is not listed on IDEAS
    6. Cavallari, Lilia & Romano, Simone, 2017. "Fiscal policy in Europe: The importance of making it predictable," Economic Modelling, Elsevier, vol. 60(C), pages 81-97.
    7. Nooman Rebei, 2017. "Evaluating Changes in the Transmission Mechanism of Government Spending Shocks," IMF Working Papers 17/49, International Monetary Fund.
    8. Salvatore Perdichizzi, 2017. "Estimating Fiscal multipliers in the Eurozone. A Nonlinear Panel Data Approach," DISCE - Working Papers del Dipartimento di Economia e Finanza def058, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    9. C. Glocker & G. Sestieri & P. Towbin, 2017. "Time-varying fiscal spending multipliers in the UK," Working papers 643, Banque de France.
    10. Nkrumah, Kwabena Meneabe, 2013. "Effect of Fiscal Policy Shocks in Brazil," MPRA Paper 72534, University Library of Munich, Germany.
    11. Andrea Boitani & Salvatore Perdichizzi, 2018. "Public Expenditure Multipliers in recessions. Evidence from the Eurozone," DISCE - Working Papers del Dipartimento di Economia e Finanza def068, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    12. de Walque, Gregory & Lundvall, Henrik & Papageorgiou, Dimitris & Rysanek, Jakub & Kulikov, Dmitry & Júlio, Paulo & Lozej, Matija & Sideris, Dimitris & Maria, José R. & Micallef, Brian & Schmidt, Sebas, 2015. "Comparing fiscal multipliers across models and countries in Europe," Working Paper Series 1760, European Central Bank.
    13. Koester, Gerrit B. & Priesmeier, Christoph, 2015. "The Timing and Responsiveness of Fiscal Policy over the Business Cycle in Germany," MPRA Paper 68412, University Library of Munich, Germany.
    14. Nicoletta Pashourtidou & Christos S. Savva & Nicolas Syrichas, 2014. "The Effects of Fiscal Consolidation on Macroeconomic Indicators in Cyprus," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 8(1), pages 93-119, June.
    15. Nkrumah, Kwabena Meneabe, 2013. "Effect of Fiscal Policy Shocks in Brazil," MPRA Paper 85432, University Library of Munich, Germany.

    More about this item

    Keywords

    Crisis; Fiscal Policy; Government; Output; Policy; Tax;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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