Salotti, Simone and Marattin, Luigi (2009): On the usefulness of government spending in the EU area.
Download (267Kb) | Preview
We investigate the effects of fiscal policy on private consumption and investment in the European Union. A certain consensus has aroused that fiscal impulses have expansionary Keynesian effects on the economic activity. However, the existing empirical literature has concentrated on few countries, mostly outside the EU. We check the validity of this result for the EU area, by using annual data and a panel vector auto-regression approach (PVAR). Our results show that increases in public spending lead to positive and significant effects on private consumption and private investment. According to our baseline estimate, a 1% increase in public spending produces a 0.36% on impact rise in private consumption, and a 0.79% impact rise in private investment. The effects are substantial, and die out slowly (faster in the case of private consumption). A further disaggregation between wage and non-wage components reveals different effects. As for the impact on private consumption, our results show that public salaries have a relatively stronger stimulating role, a result which is probably due to the importance of the public sector especially in continental Europe. On the other hand, the positive impact on private investment is mainly due to the non-wage component of government consumption.
|Item Type:||MPRA Paper|
|Original Title:||On the usefulness of government spending in the EU area|
|Keywords:||Fiscal policy, private consumption, panel vector autoregression.|
|Subjects:||E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy
C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models; Multiple Variables > C33 - Models with Panel Data; Longitudinal Data; Spatial Time Series
|Depositing User:||Simone Salotti|
|Date Deposited:||12. Dec 2009 07:03|
|Last Modified:||13. Feb 2013 12:03|
Arellano, M., Bover, O., 1995. Another Look at the Instrumental Variable Estimation of Error Component Models. Journal of Econometrics 68, pp. 29-51.
Baxter,M, King, R., 1993. Time Separable Preferences and Intertemporal Substitution Models of the Business Cycle. Quarterly Journal of Economics 99, pp. 817-40.
Beetsma, R., Giuliodori, M., Klaassen, F., 2006. Trade Spill-Overs of Fiscal Policy in the European Union: A Panel Analysis. Economic Policy 21(48), pp.639-687.
Biau, O., Girard, E., 2007. Politique budgétaire et dynamique éeconomique en France: l’approche VAR structurel. Économie et Prévision 169–171, pp. 1-24.
Blanchard, O., Perotti, R., 2002. An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output. Quarterly Journal of Economics117 (4), pp. 1329-1368.
Fatàs, A., Mihov, I., 2001. The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence. Mimeo, INSEAD.
Fiorito, R., Kollintzas, T., 2004. Public Goods, Merit Goods and the Relation between Private and Government Consumption. European Economic Review 48, pp. 1367-1398.
Gali, J., Lopez-Salido, J., Valles, J., 2007. Understanding the Effects of Government Spending on Consumption. Journal of the European Economic Association 5(1), pp. 227-270.
Gali, J., Perotti, R., 2003. Fiscal Policy and Monetary Integration in Europe. Blackwell.
Giordano, R., Momigliano, S., Neri, S., Perotti, R., 2008. The Effects of Fiscal Policy in Italy: Evidence from a VAR Model. Bank of Italy Discussion Paper 656.
Greenwood, J., Hercowitz, Z., Huffman, G., 1988. Investment, Capacity Utilization and the Real Business Cycle. American Economic Review 78, pp. 402-417.
Jaimovich, N., Rebelo, S., 2009. Can News About the Future Drive the Business Cycle?. American Economic Review 99(4), pp. 1097-1118.
Linnemann, L., 2006. The Effect of Government Spending on Private Consumption: A Puzzle? Journal of Money, Credit and Banking 38(7), pp. 1715.
Love, V., Zicchino, L., 2006. Financial Development and Dynamic Investment Behavior: Evidence from Panel VAR. Quarterly Review of Economics and Finance 46(2), pp. 190-210.
Monacelli, T., Perotti, R., 2006. Fiscal Policy, the Trade Balance and the Real Exchange Rate: Implications for International Risk Sharing. Manuscript, IGIER - Bocconi.
Monacelli, T., Perotti, R., 2008. Fiscal Policy,Wealth Effects and Mark-Ups. NBER Working Paper No. 14584.
Monacelli, T., Perotti, R., 2008. Openness and the Sectoral Effects of Fiscal Policy. Journal of the European Economic Association 6(2-3), pp. 395-403.
Perotti, R., 2004. Estimating the Effects of Fiscal Policy on OECD Countries. Working Paper, IGIER-Bocconi.
Perotti, R., 2007. In Search of the Transmission Mechanism of Fiscal Policy. Working Paper, IGIER-Bocconi.
Ramey, V.A., 2007. Identifying Government Spending Shocks: It’s All in the Timing. Manuscript, University of California, San Diego.
Ravn, M., Schmitt-Grohè S., Uribe, M., 2006. Deep Habits. Review of Economic Studies 73(1), pp. 195-218.
Romer, C. and Romer, D., 2007. The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks. Working paper, University of California, Berkeley.
Schmitt-Grohè, S., Uribe, M., 2008. What’s ‘News’ in Business Cycle. NBER Working Paper No.14215.