Fiscal Stimulus in a Monetary Union: Evidence from Eurozone Regions
43 Pages Posted: 22 Nov 2016
Date Written: April 15, 2016
This paper contributes to the open economy local fiscal multiplier literature by estimating regional output and employment responses to federal expenditure shocks in the European Union. In particular, similarly to the literature on foreign aid and growth, I use shocks to the supply of federal transfers (European Commission commitments) of structural fund spending by subnational region as instruments for annual realized expenditure in a panel from 2000-2013. I find a large, contemporaneous multiplier of 1.7 which translates into a cumulative multiplier of 4 three years after the shock. Furthermore, using a novel dataset on bilateral trade between EU regions, I find evidence of demand-driven spillovers up to three years after a shock.
Keywords: Fiscal multiplier, structural funds, monetary union
JEL Classification: E62, F45, F40
Suggested Citation: Suggested Citation