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Public Expenditure Multipliers in recessions. Evidence from the Eurozone

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  • Andrea Boitani

    (Università Cattolica del Sacro Cuore
    Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore)

  • Salvatore Perdichizzi

Abstract

During the sovereign debt crisis, many Euro countries have deployed \austerity packages" implementing structural reforms and cutting government spending. Such policies should have led to an initial decline in GDP followed by recovery and a reduction of the debt to gdp ratio. Key to this outcome is the size and sign of expenditure multipliers when the economy is in a recession. We estimate, for the Eurozone countries, expenditure multipliers in recession and expansion using the linear projection approach and forecast errors to identify exogenous expenditure shocks. The empirical evidence suggests that, in a recession, an increase in government spending will be e ective in boosting aggregate demand, crowding-in private consumption in the shortto- medium run, without raising the debt to gdp ratio but rather decreasing it. The opposite applies in expansions. Estimates also show that expenditure multipliers, in a recession, are larger in high debt/defict countries than in low debt/deficit countries. In a recession, fiscal consolidation based on expenditure cuts would have both short and medium run contractionary effects.

Suggested Citation

  • Andrea Boitani & Salvatore Perdichizzi, 2018. "Public Expenditure Multipliers in recessions. Evidence from the Eurozone," DISCE - Working Papers del Dipartimento di Economia e Finanza def068, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    • Handle: RePEc:ctc:serie1:def068
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    8. Charles J. Whalen & Felix Reichling, 2015. "The Fiscal Multiplier And Economic Policy Analysis In The United States," Contemporary Economic Policy, Western Economic Association International, vol. 33(4), pages 735-746, October.
    9. Virkola, Tuomo, 2014. "Exchange Rate Regime, Fiscal Foresight and the Effectiveness of Fiscal Policy in a Small Open Economy," ETLA Reports 20, The Research Institute of the Finnish Economy.
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    More about this item

    Keywords

    Expenditure multipliers; State-dependent scal policy; Fiscal consolidation.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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