The Impact of r-g on the Euro-Area Government Spending Multiplier

By Mario di Serio, Matteo Fragetta, Giovanni Melina

February 12, 2021

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Mario di Serio, Matteo Fragetta, and Giovanni Melina. The Impact of r-g on the Euro-Area Government Spending Multiplier, (USA: International Monetary Fund, 2021) accessed December 26, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We compute government spending multipliers for the Euro Area (EA) contingent on the interestgrowth differential, the so-called r-g. Whether the fiscal shock occurs when r-g is positive or negative matters for the size of the multiplier. Median estimates vary conditional on the specification, but the difference between multipliers in the negative and positive r-g regimes differs systematically from zero with very high probability. Over the medium run (5 years), median cumulated multipliers range between 1.22 and 1.77 when r-g is negative, and between 0.51 and 1.26 when r-g is positive. We show that the results are not driven by the state of the business cycle, the monetary policy stance, or the level of government debt, and that the multiplier is inversely correlated with r-g. The calculations are based on the estimates of a factor-augmented interacted panel vector-autoregressive model. The econometric approach deals with several technical problems highlighted in the empirical macroeconomic literature, including the issues of fiscal foresight and limited information.

Subject: Business cycles, Expenditure, Fiscal multipliers, Fiscal stance, Public debt

Keywords: Cumulated multiplier, EA country, Euro Area, Factor models, Fiscal multiplier, Government debt, Government spending multiplier, Panel VAR, Potential GDP, R-g., WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/039
Stock No:

WPIEA2021039
ISBN:

9781513569512
ISSN:

1018-5941

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