Domestic and Cross-Border Fiscal Multipliers: Evidence from Europe

NRU Higher School of Economics , 2012. No. 05.

Ягафарова А. Е.

In this paper a two-country static model is developed in order to analyze short-run fiscal multipliers and fiscal spillovers in a monetary union. Both countries are large open economies representing core and periphery countries in the Euro zone. This paper implements a structural VECM framework recognizing short-run and long-run cross-economy relationships in order to empirically investigate
the signs and magnitudes of the multipliers. Empirical analysis covers the period of 1979–2011 quarterly. The results demonstrate that domestic fiscal multipliers are positive but small suggesting that private consumption and investments might be crowded out. In addition, the domestic tax shocks have less impact on the output than the government spending shock. Effect on inflation is more significant. Cross border multipliers are also positive. Moreover, a spending spillover effect is larger than the spillover effect from a tax shock.

Keywords: Fiscal shocks, fiscal spillovers, финансовая наука, денежные и налоговые теории, кредитно-финансовые институты