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Mr. Christian H Ebeke, Nemanja Jovanovic, Ms. Laura Valderrama, and Jing Zhou
The spread of COVID-19, containment measures, and general uncertainty led to a sharp reduction in activity in the first half of 2020. Europe was hit particularly hard—the economic contraction in 2020 is estimated to have been among the largest in the world—with potentially severe repercussions on its nonfinancial corporations. A wave of corporate bankruptcies would generate mass unemployment, and a loss of productive capacity and firm-specific human capital. With many SMEs in Europe relying primarily on the banking sector for external finance, stress in the corporate sector could easily translate into pressures in the banking system (Aiyar et al., forthcoming).
Mario di Serio, Matteo Fragetta, and Mr. Giovanni Melina
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.