The Euro-Area Government Spending Multiplier at the Effective Lower Bound / Adalgiso Amendola, Mario di Serio, Matteo Fragetta, Giovanni Melina.

Format:

Book

Government document

Author/Creator:

Amendola, Adalgiso.

Contributor:

di Serio, Mario.

Fragetta, Matteo.

Melina, Giovanni.

Series:

IMF Working Papers; Working Paper ; No. 2019/133

IMF Working Papers

Language:

English

Physical Description:

1 online resource (33 pages)

Edition:

1st ed.

Place of Publication:

Washington, D.C. : International Monetary Fund, 2019.

Summary:

We build a factor-augmented interacted panel vector-autoregressive model of the Euro Area (EA) and estimate it with Bayesian methods to compute government spending multipliers. The multipliers are contingent on the overall monetary policy stance, captured by a shadow monetary policy rate. In the short run (one year), whether the fiscal shock occurs when the economy is at the effective lower bound (ELB) or in normal times does not seem to matter for the size of the multiplier. However, as the time horizon increases, multipliers diverge across the two regimes. In the medium run (three years), the average multiplier is about 1 in normal times and between 1.6 and 2.8 at the ELB, depending on the specification. The difference between the two multipliers is distributed largely away from zero. More generally, the multiplier is inversely correlated with the level of the shadow monetary policy rate. In addition, we verify that EA data lend support to the view that the multiplier is larger in periods of economic slack, and we show that the shadow rate and the state of the business cycle are autonomously correlated with its size. The econometric approach deals with several technical problems highlighted in the empirical macroeconomic literature, including the issues of fiscal foresight and limited information.

Contents:

Cover

Contents

1 Introduction

2 Methodology

2.1 Empirical Model

2.2 Data and Baseline Specification

2.3 Inference, Identification and Computation of Cumulated Government Spending Multipliers

3 Results

3.1 Impulse Responses Conditional on the Shadow Rate

3.2 Cumulated Government Spending Multipliers Conditional on Shadow Rate Levels

3.3 Average Cumulated Government Spending Multipliers in Normal Times and the ELB

3.4 Correlations of the Multiplier with the Shadow Rate and the Business Cycle

4 Robustness Checks

5 Conclusions

Appendix

A Data

A.1 Endogenous Variables

A.2 Exogenous Variables

A.3 Informational Dataset

A.4 Business Cycle Indicator

B Additional Robustness Checks

List of Tables

1 Sign Restrictions for Identifying the Government Spending Shock

2 Cumulated Government Spending Multipliers Conditional on Two Levels of the Shadow Rate Representative of Normal Times and the ELB

3 Average Cumulated Government Spending Multipliers in Normal Times and at the ELB

4 Conditional Correlations of Cumulated Multipliers with the Lagged Shadow Rate and the Lagged Business Cycle

5 Robustness Checks on the Average Cumulated Government Spending Multipliers in Normal Times and at the ELB

6 Robustness Checks on the Distributions of Di˙erences between Average Cumulated Government Spending Multipliers between Normal Times and the ELB

7 Robustness Checks on Conditional Correlations of Cumulated Multipliers with the Lagged Shadow Rate and the Lagged Business Cycle

B.1 Conditional Correlations of Cumulated Multipliers with the Contemporaneous Shadow Rate and the Contemporaneous Business Cycle

B.2 Robustness Checks on Conditional Correlations of Cumulated Multipliers with the Contemporaneous Shadow Rate and the Contemporaneous Business Cycle

List of Figures.

1 Euro Overnight Index Average (Eonia) Rate and Shadow Monetary Policy Rate in the Euro Area

2 Impulse Responses to a Government Spending Shock in Normal Times and at the ELB

3 Distributions of Di˙erences in Cumulated Government Spending Multipliers between Two Levels of the Shadow Rate Representative of Normal Times and the ELB

4 Distributions of Differences in Average Cumulated Government Spending Multipliers between Normal Times and the ELB.

Notes:

Description based on publisher supplied metadata and other sources.

ISBN:

9781498322911

1498322913

9781498322935

149832293X

OCLC:

1119617168