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The Impact of r-g on the Euro-Area Government Spending Multiplier
Author:
Mario di Serionull

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Matteo Fragettanull

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Mr. Giovanni Melina
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Series:
IMF Working Papers
Volume/Issue:
Volume 2021: Issue 039
Language:
English
Publication Date:
12 Feb 2021
DOI:
https://doi.org/10.5089/9781513569512.001
ISBN:
9781513569512
ISSN:
1018-5941
Pages:
30
Keywords:
Fiscal multiplier; Panel VAR; Factor models; Euro Area; r-g.; WP; government spending multiplier; potential GDP; cumulated multiplier; EA country; government debt
Legal-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.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2021: Issue 039