Local Autonomy and Government Spending Multipliers: Evidence from European Regions

66 Pages Posted: 4 Dec 2019

See all articles by Evi Pappa

Evi Pappa

Universidad Carlos III de Madrid

Markus Brueckner

The Australian National University

Akos Valentinyi

University of Manchester; CERS-HAS; CEPR

Date Written: November 2019

Abstract

Using a panel of 268 European regions during 1990-2014, we document that the degree of local autonomy has a significant effect on the government spending multiplier. Measured with the "Local Autonomy Index" constructed by a panel of experts under the auspices of the European Commission, the estimated effect of regional government spending on regional output is on average close to zero in countries with the lowest degree of local autonomy, while it is around one in countries with the highest degree of local autonomy. Consistent with literature, we find that regional government spending multipliers are state dependent: larger when labor markets are slack and output is below trend than when labor markets are tight and output is above trend. Greater local autonomy increases the multipliers in all states, and more so when labor markets are slack and output is below trend. To explain the empirical findings, we build a DSGE model where both local and central government spending contributes to a public good that enhances productivity of the private sector.

Keywords: elasticity of output to changes in government spending, Fiscal Decentralization, local autonomy index, multipliers, New Keynesian model of a monetary union, public spending hypothesis

JEL Classification: E12, E32, E62, F33, R12

Suggested Citation

Pappa, Evi and Brueckner, Markus and Valentinyi, Akos, Local Autonomy and Government Spending Multipliers: Evidence from European Regions (November 2019). CEPR Discussion Paper No. DP14106. Available at SSRN: https://ssrn.com/abstract=3496595

Evi Pappa

Universidad Carlos III de Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

Markus Brueckner (Contact Author)

The Australian National University ( email )

Canberra, Australian Capital Territory 2601
Australia

Akos Valentinyi

University of Manchester ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

CERS-HAS ( email )

Budaorsi ut 45
Budapest, 1112
Hungary

CEPR

London
United Kingdom

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