Combining Time-Variation and Mixed-Frequencies: An Analysis of Government Spending Multipliers in Italy

43 Pages Posted: 16 Oct 2015

See all articles by Jacopo Cimadomo

Jacopo Cimadomo

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

Antonello D’ Agostino

European Stability Mechanism

Multiple version iconThere are 2 versions of this paper

Date Written: October 16, 2015

Abstract

In this paper, we propose a time-varying parameter VAR model with stochastic volatility which allows for estimation on data sampled at different frequencies. Our contribution is twofold. First, we extend the methodology developed by Cogley and Sargent (2005), and Primiceri (2005), to a mixed-frequency setting. In particular, our approach allows for the inclusion of two different categories of variables (high-frequency and low-frequency) into the same time varying model. Second, we use this model to study the macroeconomic effects of government spending shocks in Italy over the 1988Q4-2013Q3 period. Italy - as well as most other euro area economies - is characterised by short quarterly time series for fiscal variables, whereas annual data are generally available for a longer sample before 1999. Our results show that the proposed time-varying mixed-frequency model improves on the performance of a simple linear interpolation model in generating the true path of the missing observations. Second, our empirical analysis suggests that government spending shocks tend to have positive effects on output in Italy. The fiscal multiplier, which is maximized at the one year horizon, follows a U-shape over the sample considered: it peaks at around 1.5 at the beginning of the sample, it then stabilizes between 0.8 and 0.9 from the mid-1990s to the late 2000s, before rising again to above unity during of the recent crisis.

Keywords: Time variation, mixed-frequency data, government spending multiplier

JEL Classification: C32, E62, H30, H50

Suggested Citation

Cimadomo, Jacopo and D’ Agostino, Antonello, Combining Time-Variation and Mixed-Frequencies: An Analysis of Government Spending Multipliers in Italy (October 16, 2015). ECB Working Paper No. 1856. Available at SSRN: https://ssrn.com/abstract=2675049

Jacopo Cimadomo (Contact Author)

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

Antonello D’ Agostino

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

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