Introduction In the sequence of the recent global financial and economic crisis, monetary authorities of the developed countries have decided to reduce key interest rates in order to ensure not only financial stability, but also to smooth the impacts on real output and unemployment. On the one hand, in a interest rate scenario, the ability of monetary policy to stimulate economic activity is substantially reduced. On the other hand, however, and according to data from the ECB (2012), only five Euro area countries (Estonia, Luxembourg, Slovenia, Slovakia and Finland) exhibited a debt-to-output ratio below that advocated by the Stability Growth Pact (SGP) in 2011. In this context, it is important to assess the efficiency of fiscal policy to overcome scenarios of recession or of rather slow growth in most of the Euro area countries, albeit constrained by the need to correct public finance disequilibria. From both empirical and theoretical literature we find that, usually, fiscal consolidation periods are associated with recessions. Moreover, while the literature is ambiguous on how recessions affect the size of fiscal multipliers, the Academy provides evidence of smaller impacts on output from debt-correction measures during consolidation periods, providing even evidence on Keynesian effects, namely, from cuts in public wages. We intend to assess how large are fiscal multipliers in the Euro area. In particular, we compute several multipliers on the revenue side covering for social security contributions, direct and indirect – taxes and on the expenditure side public wages, intermediate consumption, transfers and public – – investment. Moreover, we aim at contributing to the (rather sparse) literature on the size of multipliers across cycle phases or under specific periods of policy shifts, such as fiscal consolidation episodes. We compute fiscal multipliers from estimations produced through a panel-data VAR approach, using annual data for all country members, from 1998 to 2008. The paper proceeds as follows. In section 2, we provide a review of the main mechanisms that shape the size of fiscal multipliers across cycle phases and during consolidation processes. After a brief description of methodology and data (section 3), we compute fiscal multipliers in section 4, controlling for openness, debt-to-output ratio, fiscal consolidation periods and cycle phases. Finally, we present the concluding remarks in section 5.
Introduction In the sequence of the recent global financial and economic crisis, monetary authorities of the developed countries have decided to reduce key interest rates in order to ensure not only financial stability, but also to smooth the impacts on real output and unemployment. On the one hand, in a interest rate scenario, the ability of monetary policy to stimulate economic activity is substantially reduced. On the other hand, however, and according to data from the ECB (2012), only five Euro area countries (Estonia, Luxembourg, Slovenia, Slovakia and Finland) exhibited a debt-to-output ratio below that advocated by the Stability Growth Pact (SGP) in 2011. In this context, it is important to assess the efficiency of fiscal policy to overcome scenarios of recession or of rather slow growth in most of the Euro area countries, albeit constrained by the need to correct public finance disequilibria. From both empirical and theoretical literature we find that, usually, fiscal consolidation periods are associated with recessions. Moreover, while the literature is ambiguous on how recessions affect the size of fiscal multipliers, the Academy provides evidence of smaller impacts on output from debt-correction measures during consolidation periods, providing even evidence on effects, namely, from cuts in public wages. We intend to assess how large are fiscal multipliers in the Euro area. In particular, we compute several multipliers on the revenue side – covering for social security contributions, direct and indirect taxes – and on the expenditure side – public wages, intermediate consumption, transfers and public investment. Moreover, we aim at contributing to the (rather sparse) literature on the size of multipliers across cycle phases or under specific periods of policy shifts, such as fiscal consolidation episodes. We compute fiscal multipliers from estimations produced through a panel-data VAR approach, using annual data for all country members, from 1998 to 2008. The paper proceeds as follows. In section 2, we provide a review of the main mechanisms that shape the size of fiscal multipliers across cycle phases and during consolidation processes. After a brief description of methodology and data (section 3), we compute fiscal multipliers in section 4, controlling for openness, debt-to-output ratio, fiscal consolidation periods and cycle phases. Finally, we present the concluding remarks in section 5. Keynesian
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