Keynesian government spending multipliers and spillovers in the euro area

  • The global financial crisis has lead to a renewed interest in discretionary fiscal stimulus. Advocates of discretionary measures emphasize that government spending can stimulate additional private spending — the so-called Keynesian multiplier effect. Thus, we investigate whether the discretionary spending announced by Euro area governments for 2009 and 2010 is likely to boost euro area GDP by more than one for one. Because of modeling uncertainty, it is essential that such policy evaluations be robust to alternative modeling assumptions and different parameterizations. Therefore, we use five different empirical macroeconomic models with Keynesian features such as price and wage rigidities to evaluate the impact of fiscal stimulus. Four of them suggest that the planned increase in government spending will reduce private spending for consumption and investment purposes significantly. If announced government expenditures are implemented with delay the initial effect on euro area GDP, when stimulus is most needed, may even be negative. Traditional Keynesian multiplier effects only arise in a model that ignores the forward-looking behavioral response of consumers and firms. Using a multi-country model, we find that spillovers between euro area countries are negligible or even negative, because direct demand effects are offset by the indirect effect of euro appreciation.

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Metadaten
Author:Tobias J. Cwik, Volker WielandORCiDGND
URN:urn:nbn:de:hebis:30-72748
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2009,25
Series (Serial Number):CFS working paper series (2009, 25)
Document Type:Working Paper
Language:English
Year of Completion:2009
Year of first Publication:2009
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2009/12/02
Tag:Crowding-out; Fiscal Policy; Fiscal Stimulus; Government Spending Multipliers; Model Uncertainty; New-Keynesian Models
GND Keyword:Europäische Union; Währungsunion; Öffentliche Ausgaben; Fiskalpolitik; Keynessche Theorie
Note:
1st Version: July 2009 ; This Version: November 2009
HeBIS-PPN:220228779
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht