Keynesian Government Spending Multipliers and Spillovers in the Euro Area

By Tobias J. Cwik, Volker Wieland. Social Science Research Network, 2011

214 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/e5201a5b92ac8e4b2dcfa0c214746542b3055d18

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Citations in the corpus

New Keynesian versus Old Keynesian Government Spending Multipliers (2010, result): “The likely effects of euro area fiscal stimulus are investigated in several macroeconomic models by Cwik and Wieland (2009) and tend to confirm our findings for the United States.”
Fiscal Policy Shocks in the Euro Area and the US: An Empirical Assessment (2010, methodology): “For a discussion on fiscal multipliers in simulation models see Cwik and Wieland (2009) and Cogan et al. (2009).”
Cross-Border Spillovers from Fiscal Stimulus (2009, unknown): “Cwik and Wieland (2009), in turn, use a multicountry model to explore the likely consequences of the fiscal packages legislated in Europe in late 2008/early 2009.”
What fiscal policy is most effective? A Meta Regression Analysis (2015, background): “On the other hand, introducing a share of non-Ricardian consumers (Galı́ et al., 2007; Cwik and Wieland, 2011; Eggertsson and Krugman, 2012), or a central bank that operates at the zero lower bound (ZLB) (Freedman et al.”
Fiscal policy and the Great Recession in the Euro Area (2012, unknown): “We cross-check our central result by inspecting the model’s multipliers and by conducting an assessment of the European Economic Recovery Plan (EERP) similar to Cwik and Wieland (2010), European Commission (2009) and ECB (2010).”
Clearing Up the Fiscal Multiplier Morass (2011, methodology): “These results help explain some of the differences in multipliers between IMF10/73 and Cwik and Wieland (2011), as the open-economy models in those meta-studies make different assumptions about the nature of openness.”
An empirical retrospect of the impacts of government expenditures on economic growth: new evidence from the Nigerian economy (2020, unknown): “However, there are also arguments indicating that some contractionary fiscal policies may not produce the expected results as they could also exacerbate economic crisis by creating more disruptions on the growth path (Jaramillo and Cottarelli 2012; Dellepiane-Avellaneda 2015).”