Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/86846 
Year of Publication: 
2010
Series/Report no.: 
Tinbergen Institute Discussion Paper No. 10-021/2
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
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.
Subjects: 
Government spending shocks
Fiscal transmission mechanism
Structural change
Bayesian analysis
Structural vector autoregressions
Time-varying parameter models
JEL: 
C32
E62
H30
H50
Document Type: 
Working Paper

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