The Impact of r-g on the Euro-Area Government Spending Multiplier
31 Pages Posted: 9 Mar 2021
Date Written: February 1, 2021
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
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