On the Size of the Government Spending Multiplier in the Euro Area

Abstract

This article addresses the existence of a wide range of estimated government spending multipliers in a dynamic stochastic general equilibrium model of the euro area. Our estimation results and counterfactual exercises provide evidence that omitting the interactions of key ingredients at the estimation stage (such as Edgeworth complementarity/subtitutability between private consumption and government expenditures, endogenous government spending policy and general time nonseparable preferences) paves the way for potentially large biases. We argue that uncertainty on the quantitative assessments of fiscal programmes could partly originate from these biases.

Keywords

Government spending multiplier; DSGE models; Estimation bias; Euro area;

JEL codes

C32: Time-Series Models • Dynamic Quantile Regressions • Dynamic Treatment Effect Models • Diffusion Processes
E32: Business Fluctuations • Cycles
E62: Fiscal Policy