The Euro-Area Government Spending Multiplier at the Effective Lower Bound

By Adalgiso Amendola, Mario di Serio, Matteo Fragetta, Giovanni Melina

June 28, 2019

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Adalgiso Amendola, Mario di Serio, Matteo Fragetta, and Giovanni Melina. The Euro-Area Government Spending Multiplier at the Effective Lower Bound, (USA: International Monetary Fund, 2019) accessed November 21, 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 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. In the short run (one year), whether the fiscal shock occurs when the economy is at the effective lower bound (ELB) or in normal times does not seem to matter for the size of the multiplier. However, as the time horizon increases, multipliers diverge across the two regimes. In the medium run (three years), the average multiplier is about 1 in normal times and between 1.6 and 2.8 at the ELB, depending on the specification. The difference between the two multipliers is distributed largely away from zero. More generally, the multiplier is inversely correlated with the level of the shadow monetary policy rate. In addition, we verify that EA data lend support to the view that the multiplier is larger in periods of economic slack, and we show that the shadow rate and the state of the business cycle are autonomously correlated with its size. 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, Central bank policy rate, Economic growth, Expenditure, Financial services, Fiscal multipliers, Fiscal policy, Interest rate floor, Monetary policy

Keywords: Business cycles, Central bank policy rate, Cumulated multiplier, ELB regime, Euro Area, Factor models, Fiscal multiplier, Fiscal multipliers, Global, Government spending multiplier, Government spending shock, Interest rate floor, Multiplier policymaker, One-year multiplier, Panel VAR, Potential GDP, Shadow rate, WP, Zero lower bound

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/133
Stock No:

WPIEA2019133
ISBN:

9781498314947
ISSN:

1018-5941

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