Fiscal multipliers in the Eurozone: an SVAR analysis

ABSTRACT

We compute the value of fiscal multipliers (for government primary expenditure, Income and wealth taxes and for Production and import taxes) in the Eurozone countries since the creation of the currency union (2000Q1-2016Q4), in order to understand how the values can vary according to the public debt level, the pace of economic growth, and the output gap. Imposing quarterly fiscal shocks, the results showed that government expenditure had a positive effect on output, with an annual accumulated multiplier of 0.44, whereas tax multipliers presented negative signs: the Income and wealth and the Production and import taxes stood at −0.11 and −0.55, respectively. Furthermore, the spending multiplier showed a higher value for countries with lower levels of public debt, during recessions, and in countries with negative output gaps. On the other hand, tax shocks seemed to be recessive in highly indebted countries and those facing positive output gaps.

KEYWORDS:

• Fiscal multiplier
• structural VAR
• fiscal policy

JEL CLASSIFICATION:

• B22
• E62
• H62
• H63

Acknowledgments

We are grateful to two anonymous referees for very useful comments. The opinions expressed herein are those of the authors and do not reflect those of their employers.

Disclosure statement

No potential conflict of interest was reported by the authors.

Debt-Dependent Estimation

Growth-Dependent Estimation

Output Gap-Dependent Estimation

Notes

¹ It should be noted that, as demonstrated in the Hicks-Hansen model (IS-LM), as expansionist fiscal policies increase the demand for money, a synchronization with monetary policymakers may be requested. If the money supply is flexible, then the maintenance of interest rates could avoid an offset of fiscal multipliers.

² Based on Mourre and Princen (2015) and Wolswijk (2007).

³ See Prince, Dang, and Botev (2015).

⁴ For example, if the quarterly shock is 0.1 and the annual response is 0.06, then this would be equivalent to a shock of 1%, with a response of 0.6% (a multiplier of 0.6).

⁵ Shock1: 1 S.D. innovation in the logarithm of Income and wealth taxes revenue (in differences);