Transmission of Government Spending Shocks in the Euro Area: Time Variation and Driving Forces

Tinbergen Institute Discussion Paper 10-021/2

60 Pages Posted: 12 Feb 2010

See all articles by Markus Kirchner

Markus Kirchner

Tinbergen Institute

Jacopo Cimadomo

European Central Bank

Sebastian Hauptmeier

European Central Bank (ECB) - Directorate General Economics

Date Written: February 12, 2010

Abstract

This paper provides new evidence on the effects of government spending shocks and the fiscal transmission mechanism in the euro area for the period 1980-2008. Our contribution is two-fold. First, we investigate changes in the macroeconomic impact of government spending shocks using time-varying structural VAR techniques. The results show that the short-run effectiveness of government spending in stabilizing real GDP and private consumption has increased until the end-1980s but it has decreased thereafter. Moreover, government spending multipliers at longer horizons have declined substantially over the sample period. We also observe a weaker response of real wages and a stronger response of the nominal interest rate to spending shocks. Second, we provide econometric evidence on the driving forces behind the observed time variation of spending multipliers. We find that a higher ratio of credit to households over GDP, a smaller share of government investment and a larger share of public wages over total government spending have led to decreasing contemporaneous multipliers. At the same time, our results indicate that higher government debt-to-GDP ratios have negatively affected long-term multipliers.

Keywords: Government Spending Shocks, Fiscal Transmission Mechanism, Structural Change, Bayesian Analysis, Structural Vector Autoregressions, Time-Varying Parameter Models

JEL Classification: C32, E62, H30, H50

Suggested Citation

Kirchner, Markus and Cimadomo, Jacopo and Hauptmeier, Sebastian, Transmission of Government Spending Shocks in the Euro Area: Time Variation and Driving Forces (February 12, 2010). Tinbergen Institute Discussion Paper 10-021/2, Available at SSRN: https://ssrn.com/abstract=1551801 or http://dx.doi.org/10.2139/ssrn.1551801

Markus Kirchner (Contact Author)

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Jacopo Cimadomo

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Sebastian Hauptmeier

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

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