The Effects of Government Spending in the Eurozone

53 Pages Posted: 18 Feb 2021 Last revised: 22 Mar 2021

See all articles by Ricardo Duque Gabriel

Ricardo Duque Gabriel

University of Bonn - Department of Economics

Mathias Klein

Sveriges Riksbank - Research Division

Ana Sofia Pessoa

University of Bonn - Department of Economics

Date Written: March 2021

Abstract

Using a newly assembled rich dataset at the regional level, this paper provides novel empirical evidence on the fiscal transmission mechanism in the Eurozone. Our baseline estimates reveal a government spending relative output multiplier around 2, an employment multiplier of 1.4, and a cost per job created of approximately €30,000. Moreover, we find that a regional fiscal stimulus leads to a significant increase in private investment, productivity, durable consumption, and the labor share together with a significant rise in total hours worked driven by changes in the extensive margin (total employment), whereas the intensive margin (hours per worker) barely reacts. Contrarily to the common policy narrative of strong positive spillover effects, we estimate only small regional fiscal spillovers. Finally, our findings reveal strong heterogeneities across industries, states of the economy, and member states.

Keywords: Fiscal policy, Regional government spending multipliers, Eurozone, ARDECO

JEL Classification: E32, E62, R12

Suggested Citation

Gabriel, Ricardo Duque and Klein, Mathias and Pessoa, Ana Sofia, The Effects of Government Spending in the Eurozone (March 2021). Available at SSRN: https://ssrn.com/abstract=3752326 or http://dx.doi.org/10.2139/ssrn.3752326

Ricardo Duque Gabriel (Contact Author)

University of Bonn - Department of Economics ( email )

Bonn
Germany

Mathias Klein

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

Ana Sofia Pessoa

University of Bonn - Department of Economics ( email )

Bonn
Germany

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