Gauging the Effects of Fiscal Stimulus Packages in the Euro Area

50 Pages Posted: 27 Nov 2012

See all articles by Günter Coenen

Günter Coenen

European Central Bank (ECB)

Roland Straub

European Central Bank (ECB)

Mathias Trabandt

Board of Governors of the Federal Reserve System; Sveriges Riksbank

Multiple version iconThere are 2 versions of this paper

Date Written: November 9, 2012

Abstract

We seek to quantify the impact on euro area GDP of the European Economic Recovery Plan (EERP) enacted in response to the financial crisis of 2008-09. To do so, we estimate an extended version of the ECB’s New Area-Wide Model with a richly specified fiscal sector. The estimation results point to the existence of important complementarities between private and government consumption and, to a lesser extent, between private and public capital. We first examine the implied present-value multipliers for seven distinct fiscal instruments and show that the estimated complementarities result in fiscal multipliers larger than one for government consumption and investment. We highlight the importance of monetary accommodation for these findings. We then show that the EERP, if implemented as initially enacted, had a sizeable, although short-lived impact on euro area GDP. Since the EERP comprised both revenue and expenditure-based fiscal stimulus measures, the total multiplier is below unity.

Keywords: Fiscal policy, fiscal multiplier, European Economic Recovery Plan, DSGE modelling, Bayesian inference, euro area

JEL Classification: C11, E32, E62

Suggested Citation

Coenen, Günter and Straub, Roland and Trabandt, Mathias, Gauging the Effects of Fiscal Stimulus Packages in the Euro Area (November 9, 2012). FRB International Finance Discussion Paper No. 1061. Available at SSRN: https://ssrn.com/abstract=2181023 or http://dx.doi.org/10.2139/ssrn.2181023

Günter Coenen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 7887 (Phone)
+49 69 1344 6575 (Fax)

Roland Straub

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Mathias Trabandt (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE-103 37 Stockholm
Sweden

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