The Impact of r-g on the Euro-Area Government Spending Multiplier

31 Pages Posted: 9 Mar 2021

See all articles by Mario di Serio

Mario di Serio

University of Salerno

Matteo Fragetta

University of Salerno - Department of Economics

Giovanni Melina

International Monetary Fund (IMF)

Date Written: February 1, 2021

Abstract

We compute government spending multipliers for the Euro Area (EA) contingent on the interestgrowthdifferential, the so-called r-g. Whether the fiscal shock occurs when r-g is positive or negativematters for the size of the multiplier. Median estimates vary conditional on the specification, but thedifference between multipliers in the negative and positive r-g regimes differs systematically fromzero with very high probability. Over the medium run (5 years), median cumulated multipliers rangebetween 1.22 and 1.77 when r-g is negative, and between 0.51 and 1.26 when r-g is positive. Weshow that the results are not driven by the state of the business cycle, the monetary policy stance, orthe level of government debt, and that the multiplier is inversely correlated with r-g. The calculationsare based on the estimates of a factor-augmented interacted panel vector-autoregressive model. Theeconometric approach deals with several technical problems highlighted in the empiricalmacroeconomic literature, including the issues of fiscal foresight and limited information.

JEL Classification: C32, C33, C38, E62, H63, H50, E30

Suggested Citation

di Serio, Mario and Fragetta, Matteo and Melina, Giovanni, The Impact of r-g on the Euro-Area Government Spending Multiplier (February 1, 2021). Available at SSRN: https://ssrn.com/abstract=3799631 or http://dx.doi.org/10.2139/ssrn.3799631

Mario Di Serio (Contact Author)

University of Salerno ( email )

Via Giovanni Paolo II, 132
Fisciano, Salerno 84084
Italy

Matteo Fragetta

University of Salerno - Department of Economics ( email )

Via John Paul II, 132
Fisciano (SA), 84084
Italy

Giovanni Melina

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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