- Transmission of government spending shocks in the Euro area: time variation and driving forces
- Number of pages
- Amsterdam: Universiteit van Amsterdam
- Document type
- Working paper
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
This paper applies structural vector autoregressions with time-varying parameters in order to investigate changes in the effects of government spending shocks in the euro area, and the driving forces of those changes. Our contribution is two-fold. First, we present evidence that the short-run impact of government spending on real GDP and private consumption has increased until the end-1980s but it has decreased thereafter, along with a weaker response of the real wage and a stronger response of the nominal interest rate. Moreover, spending multipliers at longer horizons have declined substantially over the period 1980-2008. Second, exploiting state dependency using second-stage inference, we show that these changes can be traced back to increasing availability of credit and rising debt-to-GDP ratios in the euro area, as well as a smaller share of government investment and a larger share of public wages in total spending.
- Incl. Technical annex
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