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N° 2006-24 |
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| December 2006 |
| Changing Patterns of Domestic and Cross-Border Fiscal Policy Multipliers in Europe and the US |
Agnès Bénassy-Quéré
Jacopo
Cimadomo |
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| This paper documents time variation in domestic fiscal policy multipliers in Germany, the UK
and the US, and in cross-border fiscal spillovers from Germany to the seven largest European
Union economies. We propose two VAR models which incorporate three “global factors”
representing developments in the world economy, and we combine them with identification
of fiscal shocks à la Blanchard and Perotti (2002) and Perotti (2005), to study the effects of
net tax and government spending shocks on GDP, inflation and interest rates. By recursively
estimating these models on different samples of data, we find that the domestic impact of
tax shocks has been positive but vanishing for Germany and the US, stably not significant
for the UK. Financial markets deregulations may play an important role in that since they
allow households to be less dependent on disposable income and to smooth more easily consumption.
Domestic government spending multipliers are found to be positive but feeble in
the short-run and close to zero or slightly negative in the medium-run, implying that private
consumption and investments might be crowded out. These results suggest that, in the European
Monetary Union, discretionary fiscal policy “surprises” (i.e. unexpected tax cuts and
government spending expansions) cannot be used by governments as substitutes for lost national
monetary instruments, since they have shown to be progressively ineffective over time.
Finally, we find that fiscal expansions in Germany have had beneficial (though declining) effects
for neighboring countries, especially the smaller ones. This may indicate that the trade
channel of transmission of fiscal policy dominates the interest rate one. |
Abstract |
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| Fiscal policy effectiveness, fiscal shocks, spillovers, factor-augmented VAR, Great
Moderation. |
Keywords |
| E30, E61, E62 |
JEL classification |
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