Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153946
Authors: 
Nickel, Christiane
Tudyka, Andreas
Year of Publication: 
2013
Series/Report no.: 
ECB Working Paper 1513
Abstract: 
We investigate the impact of fiscal stimuli at different levels of the government debt-to-GDP-ratio for a sample of 17 European countries from 1970 to 2010. This is implemented in an interacted panel VAR framework in which all coefficient parameters are allowed to change continuously with the debt-to-GDP ratio. We find that responses to government spending shocks exhibit strong non-linear behaviour. While the overall cumulative effect of a spending shock on real GDP is positive and significant at moderate debt-to-GDP ratios, this effect turns negative as the ratio increases. The total cumulative effect on the trade balance is negative at first but switches sign at higher levels of debt. Consequently, depending on the degree of public indebtedness, our results accommodate long-run fiscal multipliers which are greater and smaller than one or even negative as well as twin deficit and twin divergence behaviour within one sample and time period. From a policy perspective, these results lend additional support to increased prudence at high public debt ratios because the effectiveness of fiscal stimuli to boost economic activity or resolve external imbalances may not be guaranteed.
Subjects: 
Bayesian estimation
debt dynamics
Fiscal Policy
non-linearities
panel-VAR
trade account
JEL: 
E62
F32
F41
C32
C11
Document Type: 
Working Paper

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