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Time Varying Fiscal Multipliers in Germany
TL;DR: In this article, the authors used an expectations-augmented vector autoregressive model with time varying parameters (TVP-VAR) to show that German government multipliers are not stable over time but exhibit a u-shaped pattern.
Abstract: This paper provides novel evidence on the time varying impact of government spending shocks on output in Germany over the years 1970 to 2013. In a first step, I use an expectations-augmented vector autoregressive model with time varying parameters (TVP-VAR) to show that fiscal multipliers are not stable over time but exhibit a u-shaped pattern. While multipliers fluctuate around 2 at the beginning and end of the sample, they are much smaller in between. In a second step, I discuss which factors determine the magnitude of German multipliers and hence explain the observed variation. It turns out that fiscal policy is more effective when business uncertainty is high but less in periods of financial market stress, while the state of the business cycle is minor important. Moreover, I find that fiscal sustainability is a crucial determinant of the multipliers and that these are about 1 euro higher since the loss of monetary policy autonomy due to the adoption of the euro. And finally, I conclude that policy recommendations based on average multipliers are misleading.
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TL;DR: In this article, the authors explore how business uncertainty affects the effectiveness of fiscal policy in Germany in the years 1970 to 2014 and find that the difference in multipliers across uncertainty levels is largest for longer-term horizons.
Abstract: This paper explores how business uncertainty affects the effectiveness of fiscal policy in Germany in the years 1970 to 2014. I use measures of business uncertainty that are derived from the firm-level data of the Ifo Business Climate Survey and interact them with the parameters of a structural vector autoregression to produce state-dependent spending multipliers. I observe that fiscal policy is most effective when uncertainty is high and that the difference in multipliers across uncertainty levels is largest for longer-term horizons. The results also point to a prominent role for business confidence in the state-dependent transmission of spending shocks to output. The findings have an important implication for stabilization policies. Since monetary policy is less effective during volatile episodes, fiscal policy is the better tool to stimulate the economy in uncertain times.
12 citations
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03 Feb 2013
TL;DR: This article examined the effects of fiscal policy actions on private consumption in a yearly panel of sixteen OECD countries conditional on the phase of the business cycle and the state of the public finances, and demonstrated that binding liquidity constraints on households can alter the efficacy of the policy changes in the four regimes.
Abstract: I examine the effects of fiscal policy actions on private consumption in a yearly panel of sixteen OECD countries conditional on the phase of the business cycle and the
state of the public finances. I demonstrate that binding liquidity constraints on households can alter the efficacy of the policy changes in the four regimes—defined by the conditioning states—with expansionary fiscal policy boosting consumption in recessions, having a nil effect on it in normal times or in fiscal stress, and strongly displacing consumption in mixed states when recession and fiscal stress coincide. This happens because the liquidity constrained households consume the additional income generated by an expansionary fiscal policy in recession, and save it in normal times or in fiscal stress when liquidity constraints are not binding. If recession and fiscal stress coincide, fiscal action have an extra distortionary effect on income, and consequently on consumption.
3 citations
TL;DR: In this paper , the effectiveness of different fiscal policies in the Federation of Bosnia and Herzegovina (FBiH) was examined using a structural macroeconomic model for the FBiH, and the results showed that policy measures that reduce the tax wedge on labour income are highly effective in stimulating employment.
Abstract: Abstract We examine the effectiveness of different fiscal policies in the Federation of Bosnia and Herzegovina (FBiH). For this purpose, we use a structural macroeconomic model for the FBiH. In this model, GDP in the Federation is influenced by world demand and by domestic demand in the Federation. Domestic demand comprises consumption of private households, public consumption, and gross fixed capital formation. Employment depends positively on GDP and negatively on the tax wedge, i.e., the net wage plus social security contribution rates (including the unemployment insurance), and the personal income tax rate in the Federation. The latter allows the analysis of the impact of changes in social security contribution rates or in the income tax rate in the Federation of Bosnia and Herzegovina. The following Federation-specific policy instruments are implemented in the model for the FBiH: Pension funds contribution rate in FBiH; contribution rate for health insurance in FBiH; contribution rate for the unemployment insurance in FBiH; benefits from social security; direct tax rates (income tax rate, corporate tax rate); public consumption in FBiH. Our results show that policy measures that reduce the tax wedge on labour income are highly effective in stimulating employment. Due to the large elasticity of imports with respect to demand, pure demand-side measures have little impact on real variables, indicating that a small open economy like the Federation of Bosnia and Herzegovina has only little scope for influencing macroeconomic developments with pure demand management policies. Our results confirm earlier theoretical and empirical studies showing that the labour market can best be influenced positively by reducing the tax wedge. The multipliers of income tax reductions are larger and oscillate more than the effects of the other fiscal policy measures.
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TL;DR: In this paper, the authors present a unified approach to impulse response analysis which can be used for both linear and nonlinear multivariate models and demonstrate the use of these measures for a nonlinear bivariate model of US output and the unemployment rate.
3,821 citations
"Time Varying Fiscal Multipliers in ..." refers background in this paper
...…the future path of the coefficients and the covariance matrix, hence taking into account all potential sources of uncertainty arising from changes in lagged coefficients, contemporaneous relations, and additive innovations (see, e.g., Koop, 1996; Koop, Pesaran, and Potter, 1996, among others)....
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TL;DR: This work shows how to use the Gibbs sampler to carry out Bayesian inference on a linear state space model with errors that are a mixture of normals and coefficients that can switch over time.
Abstract: SUMMARY We show how to use the Gibbs sampler to carry out Bayesian inference on a linear state space model with errors that are a mixture of normals and coefficients that can switch over time. Our approach simultaneously generates the whole of the state vector given the mixture and coefficient indicator variables and simultaneously generates all the indicator variables conditional on the state vectors. The states are generated efficiently using the Kalman filter. We illustrate our approach by several examples and empirically compare its performance to another Gibbs sampler where the states are generated one at a time. The empirical results suggest that our approach is both practical to implement and dominates the Gibbs sampler that generates the states one at a time.
2,146 citations
"Time Varying Fiscal Multipliers in ..." refers methods in this paper
...Given that S is block-diagonal, the algorithm of Carter and Kohn (1994) can be applied equation by equation to obtain draws for αi,t from N ( αi,t|t+1,Λi,t|t+1 ) , where αi,t|t+1 = E ( αi,t|αi,t+1, Y T , BT ,ΣT , Q, S,W ) and Λi,t|t+1 = Var ( αi,t|αi,t+1, Y T , BT ,ΣT , Q, S,W ) ....
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...Given that S is block-diagonal, the algorithm of Carter and Kohn (1994) can be applied equation by equation to obtain draws for αi,t from N (...
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...…j = 1, ..., 7, used for each element of e. Conditional on BT , AT , Q, S, W , and sT , the system is approximately Gaussian and the algorithm of Carter and Kohn (1994) can be used to draw ht from N ( ht|t+1, Ht|t+1 ) , where ht|t+1 = E ( ht|ht+1, Y T , AT , BT , Q, S,W, sT ) and Ht|t+1 =…...
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...Draws for Bt = Bt−1 + νt are obtained from N ( Bt|t+1, Pt|t+1 ) , where Bt|t+1 = E ( Bt|Bt+1, Y T , AT ,ΣT , Q, S,W ) and Pt|t+1 = Var ( Bt|Bt+1, Y T , AT ,ΣT , Q, S,W ) , using the algorithm of Carter and Kohn (1994)....
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...Conditional on B , A , Q, S, W , and s , the system is approximately Gaussian and the algorithm of Carter and Kohn (1994) can be used to draw ht from N (...
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TL;DR: In this article, the size of the multiplier in a dynamic, stochastic, general equilibrium model was investigated and it was shown that the multiplier effect is substantially larger than one when the zero lower bound on the nominal interest rate binds.
Abstract: We argue that the government-spending multiplier can be much larger than one when the zero lower bound on the nominal interest rate binds. The larger the fraction of government spending that occurs while the nominal interest rate is zero, the larger the value of the multiplier. After providing intuition for these results, we investigate the size of the multiplier in a dynamic, stochastic, general equilibrium model. In this model the multiplier effect is substantially larger than one when the zero bound binds. Our model is consistent with the behavior of key macro aggregates during the recent financial crisis.
1,798 citations
TL;DR: In this paper, the authors extend the standard new Keynesian model to allow for the presence of rule-of-thumb consumers and show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending.
Abstract: Recent evidence suggests that consumption rises in response to an increase in government spending. That finding cannot be easily reconciled with existing optimizing business cycle models. We extend the standard new Keynesian model to allow for the presence of rule-of-thumb consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending. (JEL: E32, E62)
1,542 citations
Posted Content•
TL;DR: This paper showed that a key difference in the approaches is the timing of the news, implying that the VAR shocks are missing the timing and that faulty timing can produce a rise in consumption even when it decreases in the model.
Abstract: Do shocks to government spending raise or lower consumption and real wages? Standard VAR identification approaches show a rise in these variables, whereas the Ramey-Shapiro narrative identification approach finds a fall. I show that a key difference in the approaches is the timing. Both professional forecasts and the narrative approach shocks Granger-cause the VAR shocks, implying that the VAR shocks are missing the timing of the news. Simulations from a standard neoclassical model in which government spending is anticipated by several quarters demonstrate that VARs estimated with faulty timing can produce a rise in consumption even when it decreases in the model. Motivated by the importance of measuring anticipations, I construct two new variables that measure anticipations. The first is based on narrative evidence that is much richer than the Ramey-Shapiro military dates and covers 1939 to 2008. The second is from the Survey of Professional Forecasters, and covers the period 1969 to 2008. All news measures suggest that most components of consumption fall after a positive shock to government spending. The implied government spending multipliers range from 0.6 to 1.1.
1,212 citations