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In search of the transmission mechanism of fiscal policy in the Euro area

Listed author(s):
  • Fève, Patrick
  • Sahuc, Jean-Guillaume

Hand-to-mouth consumers and Edgeworth complementarity between private consumption and public expenditures are two competing mechanisms that were put forward by the literature to investigate the effects of government spending. Using Bayesian prior and posterior analysis and several econometric experiments, we find that a model with Edgeworth complementarity is a better representation for the transmission mechanism of fiscal policy in the euro area. We also show that a small change in the degree of Edgeworth complementarity has a large impact on the estimated share of hand-to-mouth consumers. These findings are robust to a number of perturbations.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 840.

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Date of creation: 07 Nov 2014
Handle: RePEc:ide:wpaper:28761
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