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The euro-area government spending multiplier at the effective lower bound

Author

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  • Amendola, Adalgiso
  • Di Serio, Mario
  • Fragetta, Matteo
  • Melina, Giovanni
Abstract
We build a factor-augmented interacted panel vector-autoregressive model of the Euro Area (EA) and estimate it with Bayesian methods to compute government spending multipliers. The multipliers are contingent on the overall monetary policy stance, captured by a shadow monetary policy rate. Whether the fiscal shock occurs when the economy is at the effective lower bound (ELB) or in normal times matters for the size of the multiplier. Median estimates vary conditional on the specification, but the difference between multipliers at the ELB and in normal times is systematically positive with very high probability. Over the medium run (5 years), median cumulated multipliers range between 0.3 and 1.4 in normal times, and between 1.6 and 2.9 at the ELB. We show that the results are not driven by the state of the business cycle and that the multiplier is inversely correlated with the level of the shadow monetary policy rate. The econometric approach deals with several technical problems highlighted in the empirical macroeconomic literature, including the issues of fiscal foresight and limited information.

Suggested Citation

  • Amendola, Adalgiso & Di Serio, Mario & Fragetta, Matteo & Melina, Giovanni, 2020. "The euro-area government spending multiplier at the effective lower bound," European Economic Review, Elsevier, vol. 127(C).
    • Handle: RePEc:eee:eecrev:v:127:y:2020:i:c:s0014292120301124
    DOI: 10.1016/j.euroecorev.2020.103480
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    5. Mario Di Serio & Matteo Fragetta & Emanuel Gasteiger, 2020. "The Government Spending Multiplier at the Zero Lower Bound: Evidence from the United States," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(6), pages 1262-1294, December.
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    10. Priscila Espinosa & Daniel Aparicio-Pérez & Emili Tortosa-Ausina, 2023. "On the Impact of Next Generation EU Funds: A Regional Synthetic Control Method Approach," Working Papers 2023/07, Economics Department, Universitat Jaume I, Castellón (Spain).
    11. Mario Di Serio & Matteo Fragetta & Emanuel Gasteiger & Giovanni Melina, 2022. "The Euro Area Government Spending Multiplier in Demand- and Supply-Driven Recessions," CESifo Working Paper Series 9678, CESifo.
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    More about this item

    Keywords

    Fiscal multiplier; Zero lower bound; Panel VAR; Factor models; Euro area;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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