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How large are fiscal multipliers? A panel-data VAR approach for the Euro area

  • Ricardo Silva

    ()

    (Faculdade de Economia, University of Porto)

  • Vitor Manuel Carvalho

    ()

    (Faculdade de Economia, University of Porto and CEF.UP)

  • Ana Paula Ribeiro

    ()

    (Faculdade de Economia, University of Porto and CEF.UP)

In the current context where the limited role for monetary policy instruments apparently endows fiscal policy with higher effectiveness, European fiscal policy authorities are rather constrained by the fact of most countries being struggling against recessions together with the need to put public finances in a sustainable path. In this context, we assess how large are fiscal multipliers in Europe, for both aggregated and disaggregated spending and revenue variables. Moreover, we analyze how cycle phases and fiscal consolidation episodes shape the size of fiscal multipliers. We present evidence for the Euro area, relying on a VAR model with pooled annual data from 1998 to 2008. Estimation results show that, on average, transfers are the main driving force for the overall expenditure dynamics; moreover, wages exhibit negative impacts on output while positive effects are strongly driven by shocks in public investment and, to a lesser extent, by intermediate consumption. On the revenue side, all items impinge negatively on output growth. Additionally, our results show that public spending multiplier is positive in recessions while in expansions is smaller, inclusively, negative. Similarly, the effectiveness of the tax multiplier is, also, higher in recessions. Finally, we have found that consolidation phases affect negatively the size of multipliers.

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Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 500.

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Length: 29 pages
Date of creation: Aug 2013
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Handle: RePEc:por:fepwps:500
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