Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2010-02-12
Number: 10-021/2
Author-Name: Markus Kirchner
Author-Workplace-Name: University of Amsterdam
Author-Name: Jacopo Cimadomo
Author-Workplace-Name: European Central Bank
Author-Name: Sebastian Hauptmeier
Author-Workplace-Name: European Central Bank
Title: Transmission of Government Spending Shocks in the Euro Area: Time Variation and Driving Forces
Abstract: This paper provides new evidence on the effects of government spending shocks and the fiscal transmission mechanism in the euro area for the period 1980-2008. Our contribution is two-fold. First, we investigate changes in the macroeconomic impact of government spending shocks using time-varying structural VAR techniques. The results show that the short-run effectiveness of government spending in stabilizing real GDP and private consumption has increased until the end-1980s but it has decreased thereafter. Moreover, government spending multipliers at longer horizons have declined substantially over the sample period. We also observe a weaker response of real wages and a stronger response of the nominal interest rate to spending shocks. Second, we provide econometric evidence on the driving forces behind the observed time variation of spending multipliers. We find that a higher ratio of credit to households over GDP, a smaller share of government investment and a larger share of public wages over total government spending have led to decreasing contemporaneous multipliers. At the same time, our results indicate that higher government debt-to-GDP ratios have negatively affected long-term multipliers.
Classification-JEL: C32, E62, H30, H50
Keywords: Government spending shocks, Fiscal transmission mechanism, Structural change, Bayesian analysis, Structural vector autoregressions, Time-varying parameter models
File-Url: https://papers.tinbergen.nl/10021.pdf
File-Format: application/pdf
File-Size: 1042561 bytes
Handle: RePEc:tin:wpaper:20100021