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

64 Pages Posted: 19 Jul 2010

See all articles by Markus Kirchner

Markus Kirchner

Central Bank of Chile

Jacopo Cimadomo

European Central Bank; Centre d'Etudes Prospectives et d'Info. Internationales (CEPII)

Sebastian Hauptmeier

European Central Bank (ECB) - Directorate General Economics

Date Written: June 17, 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, 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 (June 17, 2010). ECB Working Paper No. 1219. Available at SSRN: https://ssrn.com/abstract=1626267

Markus Kirchner (Contact Author)

Central Bank of Chile ( email )

United States

Jacopo Cimadomo

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII) ( email )

9 rue Georges Pitard
Paris Cedex 15, F-75015
France

Sebastian Hauptmeier

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

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

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