Abstract:
We examine the aggregate effects of government spending and tax changes in a monetary union. We show theoretically that government consumption and government investment shocks have multipliers above 1, and consumption tax and income tax shocks have multipliers below 1. We test the predictions on quarterly euro area data, identifying the four fiscal shocks in a panel structural vector autoregression through time fixed effects and cross-country heteroskedasticity. Both spending shocks have multipliers above 1, and both tax shocks have multipliers below 1. The analysis suggests that spending policy stabilizes output more efficiently than tax policy in a monetary union.
