Public spending, monetary policy and growth: Evidence from EU countries

Papaioannou, Sotiris (2016): Public spending, monetary policy and growth: Evidence from EU countries.

Abstract

This study examines whether differences in monetary policy are associated with diverging effects of public spending on growth. At first stage, we estimate public spending multipliers for each country of the European Union (EU). Their size varies considerably across countries. Then we incorporate in the analysis the role of monetary policy and examine whether real interest rates affect the relationship between public spending and growth. The main result of the econometric analysis is that government spending can affect growth positively only when real interest rates become negative. This result remains robust to several changes in the econometric specification and measures of interest rate.

• Item Type: MPRA Paper
• Language: English
• Keywords: Public spending, Fiscal multipliers, Monetary policy, Economic growth.
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General

References

Alesina, A., Ardagna, S., 2010, Large changes in fiscal policy: taxes versus spending In: Brown, J., (ed.), Tax Policy and the Economy, pp. 35-68.

AMECO, 2015, Annual Macroeconomics Database.

Arellano, M., Bond, S., 1991, Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations, Review of Economic Studies 58: 277-297.

Arellano, M., Bover, O., 1995, Another look at the instrumental variable estimation of error-components models, Journal of Econometrics 68: 29-51.

Baxter, M., King, R., 1993, Fiscal policy in general equilibrium, American Economic Review 83: 315-334.

Blanchard, O., Perotti, R., 2002, An empirical characterization of the dynamic effects of changes in government spending and taxes on output, Quarterly Journal of Economics 117: 1329-1368.

Blundell, R., Bond. S., 1998, Initial conditions and moment restrictions in dynamic panel data models, Journal of Econometrics 87: 115-43.

Burnside, C., Eichenbaum, M., Fisher, J., 2004, Fiscal shocks and their consequences, Journal of Economic Theory 115: 89-117.

Christiano, L., Eichenbaum, M., Rebelo, S., 2011, When is the government spending multiplier large? Journal of Political Economy 119: 78-121.

Chung, H., Leeper, M., 2007, What has financed government debt? NBER Working Paper No. 13425.

Cogan, J.F., Cwik, T., Taylor, J.B., Wieland, V., 2010, New Keynesian versus old Keynesian government spending multipliers, Journal of Economic Dynamics and Control 34: 281-295.

Conenen, G., Erceg, C., Fredman, C., Furceri, D., Kumhof, M., Lalonde, R., Laxton, D., Linde, J., Mourougane, A., Muir, D., Mursula, S., De Resende, C., Roberts, J., Roeger, W., Snudden, S., Trabanst, M., Veld, J., 2012, Effects of fiscal stimulus in structural models, American Economic Journal: Macroeconomics 4, 22-68.

Davig, T., Leeper, E.M., 2011, Monetary-fiscal policy interactions and fiscal stimulus, European economic Review 55, 211-227.

Eggertsson, G., 2011, What Fiscal Policy is Effective at Zero Interest Rates?, NBER Macroeconomics Annual 25, 59 – 112.

Eurostat, 2014, National Accounts Database.

Favero, C., Giavazzi, F., 2007, Debt and the effects of fiscal policy, NBER Working Paper No. 12822.

Feenstra, R., Inklaar, R,, Timmer, M., 2013, The next generation of the Penn World Table. Available at: www.ggdc.net/pwt.

Gali, J., Lopez-Salido, J.D., Valles, J., 2007, Understanding the effects of government spending on consumption, Journal of the European Economic Association 5: 227-270.

Hall, R.E., 2009, By how much does GDP rise if the government buys more output? Brookings Papers on Economic Activity 40: 183-249.

Ilzetzaki, E., Mendoza, G., Vegh, C., 2013, How big (small) are fiscal multipliers? Journal of Monetary Economics 60: 239-254.

Micossi, S., 2015, The monetary policy of the European Central Bank (2002-2015). CEPS Special Report No. 109.

Monacelli, T., Perotti, R., 2008, Fiscal policy, wealth effects and markups, NBER Working Paper No. 14584.

Monacelli, T., Perotti, R., Trigari, A., 2010, Unemployment fiscal multipliers, Journal of Monetary Economics 57: 531-553.

Mountford, A., Uhlig, H., 2009, What are the effects of fiscal policy shocks? Journal of Applied Econometrics 24: 960-992.

Perotti, R., 1999, Fiscal policy in good times and bad, Quarterly Journal of Economics 114: 1399-1436.

Perotti, R., 2005, Estimating the effects of fiscal policy in OECD countries, Proceedings, Federal Reserve Bank of San Francisco.

Perotti, R., 2007, In search of the transmission mechanism of fiscal policy, NBER Macroeconomics Annual 22: 169-226.

Ramey, V., 2011, Identifying government expenditure shocks: it is all in the timing, Quarterly Journal of Economics 126: 1-50.

Veld J., Larch M.,Vandeweyer M., 2012, Automatic fiscal stabilizers: what they are and what they do, European Economy Economic Paper No.452, European Commission.

World Development Indicators, 2015, World Bank.