WHEN DOES IT PAY TO TAX? EVIDENCE FROM STATE-DEPENDENT FISCAL MULTIPLIERS IN THE EURO AREA
Bank of Greece and Harokopio University
Bank of Greece
The impact of fiscal policy on economic growth is investigated within a panel of euro area member states over the period 2004-2011. We mainly consider fiscal impulses identified by (a) changes in the structural primary balance, complemented by evidence from (b) the IMF narrative shocks developed by Devries et al (2011) and (c) a VAR-based measure of unanticipated policy announcements. Aggregate fiscal multipliers are estimated in the region of 0.5, although we find considerable variation depending on the fiscal mix, the degree of openness and the state of the economy. During episodes of recession, tax hikes become significantly more costly in terms of output than expenditure cuts. This appears to be related to increases in the share of hand-to-mouth consumers, proxied by the unemployment rate. Fiscal effects are generally more muted in open economies and during periods of positive growth. Country-specific features in Greece lead to significantly higher estimates, possibly in excess of unity in 2011, reflecting predominantly sizeable revenue effects.
JEL classification: E62, H22, H50
Keywords: Fiscal multipliers, state-dependence, euro area
Acknowledgments: We are most grateful for very helpful comments to participants at the 18th International Conference on Macroeconomic Analysis and International Finance in Rethymno, May 2014 and the 16th Banca d’Italia Workshop on Public Finance in Perugia, April 2014. The views of the paper are of the authors and do not necessarily reflect those of the Bank of Greece. All remaining errors are ours.
Economic Analysis and Research Department
Bank of Greece
21, E. Venizelos Avenue,
Athens 102 50, Greece
Tel. +30 210 3202429