The Effects of Government Spending in the Eurozone

Using a novel rich dataset at the regional level, this paper provides new empirical evidence on the fiscal transmission mechanism in the Eurozone. Our baseline estimates reveal a government spending relative output multiplier of 2.9, an employment multiplier of 1.9, and a cost per job created of €24,000. Moreover, we find that a regional fiscal stimulus leads to a significant increase in private investment, productivity, durable consumption, and real wages together with a significant rise in total hours worked driven by changes in the extensive margin (total employment), whereas the intensive margin (hours per worker) barely reacts. We estimate only small regional fiscal spillovers but detect notable state dependencies. Regional fiscal multipliers are larger in economic recessions, during fiscal consolidations, and in the core countries of the Eurozone.