Abstract
This paper deals with the problems of assessing the effects of fiscal policy in the European Monetary Union. Here, we face wide cross-country differences in key fiscal parameters, some of which may also be vary over time (business cycle). Moreover, these effects may also depend on trade spillover effects and thus on the extent of policy coordination. Our empirical analyses make use of data for 15 EU countries, mainly for the period 1970–2011. The results clearly indicate that fiscal multipliers are not constant across countries and time, being much larger during economic recessions. By contrast, the policy coordination-effects appear to be more homogenous, although it turns out that small countries may benefit more from coordination.
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Notes
NiGEM is an estimated quarterly New-Keynesian macro model for almost all OECD countries and country blocks outside OECD (National Institute (1999). In evaluating the effects of fiscal policy, an obvious analytical framework is provided by (structural) VAR models (see Blanchard and Perotti (2002), Dalsgaard and De Serres (1999) and Viren (2000) and Ilzetzki et al (2009)). But because we concentrate here on the policy coordination problem, structural multi-country models are more convenient.
The Cohen and Follette (1999) value for US data (with four lags) was 1.23 which may be compared with our average EMU10 value of 1.25. When the tax rates were set to zero in the FRB/US model the multiplier increased to 1.35, which indicates how much (or how little) automatic stabilisers will affect the multiplier. Interestingly the multiplier value of 1.25 implies a relatively small marginal propensity to consume. Assuming the average tax rate is 0.4 we come to a marginal propensity to consume of about 0.3 only (or 0.4 if we account for imports).
These two alternative measures are compared by Guajardo et al. (2011). They find several weaknesses in the conventional measure and also that this measure may have a biased tendency to produce expansionary output effects for fiscal consolidation.
The (possibly nonzero) threshold estimated by the maximum likelihood procedure was close to zero, so those results are not reported.
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I am grateful to Sami Oinonen for research assistance and the OP Bank Group Research Foundation for financial support. Useful comments from an anonymous referee as well as participants of EUROFRAME 2013 and NIFIP 2012 conferences are also gratefully acknowledged.
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Viren, M. Sensitivity of fiscal-policy effects to policy coordination and business cycle conditions. Int Econ Econ Policy 11, 397–411 (2014). https://doi.org/10.1007/s10368-013-0240-0
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DOI: https://doi.org/10.1007/s10368-013-0240-0