Working Paper Series no. 537: On the Size of the Government Spending Multiplier in the Euro Area

Abstract

This article addresses the existence of a wide range of estimated government spending multipliers in a dynamic stochastic general equilibrium model of the euro area. Our estimation results and counterfactual exercises provide evidence that omitting the interactions of key ingredients at the estimation stage (such as Edgeworth complementarity/substitutability between private consumption and government expenditures, endogenous government spending policy and general habits in consumption) paves the way for potentially large biases. We argue that uncertainty on the quantitative assessments of fiscal programmes could partly originate from these biases.

Patrick Fève and Jean-Guillaume Sahuc
February 2015

Classification JEL : C32, E32, E62

Keywords : Government spending multiplier, DSGE models, Estimation bias, Euro area