Antonella Cavallo

The Common Framework for National Fiscal Policies and the Euro Area Fiscal Union

The aims of this chapter are threefold. First, we provide an outline of the existing European regulatory framework for national fiscal policies. Second, we present and discuss some existing proposals of Fiscal Union for the Euro Area. Third, in the perspective of the evolution of Euro Area towards a full Monetary and Fiscal Union, we estimate and identify a structural VAR in order to study the effects of area-wide government spending shocks on aggregate output and other macroeconomic variables during the EMU period. We find that the government spending multiplier is above one, i.e. there are positive and sizeable effects exerted on output by increases in government expenditures. We also find that when fiscal stimuli are accommodated by monetary policy, spending multipliers have a notable increase. This overall picture is reinforced by analyzing the effects of government investment on macrovariables. Our main conclusion is that a centralized fiscal policy might successfully pursue the goal of macroeconomic stabilization in the Euro Area.

The Macroeconomic Effects of Fiscal Shocks in High Debt Euro Area Countries

The aim of this chapter is to characterize the response of prices and GDP to monetary policy and fiscal shocks in a group of Euro-area countries affected by high public and/or private debt-to-GDP ratio. We utilize the structural near-VAR methodology, by jointly modeling Euro area-wide and national variables. We find that during the EMU period, in Italy, Greece and Portugal a fiscal tightening caused a contraction of aggregate output. Instead, for Ireland, Netherland and Spain we find an opposite result: fiscal austerity exerted expansionary effects on the economy. However, in almost all the countries included in this investigation, fiscal shocks explain only a small part of the variability of both output and prices, while a greater role seems to have been played by monetary policy shocks and, more generally, by Euro-area common shocks. The exception is represented by Greece, where fiscal shocks played a notable role as drivers of aggregate output fluctuations.

The Macroeconomic Effects of Fiscal Policy Shocks: A Review of the Literature

In this chapter we provide a review of the literature using multivariate time series techniques, and in particular structural VARs and panel VARs, to study the effects of fiscal policy shocks on macroeconomic variables. In the last decades the traditional Keynesian view on fiscal policy as a useful tool for macroeconomic stabilization has been challenged on the ground of possible expansionary effects associated with fiscal consolidations. However, as will be seen, recent research shows heterogeneous results. It seems possible at this stage to identify an emerging consensus, related to the conclusion that the size of fiscal multipliers, i.e. the size of the response of output to exogenous changes in government expenditures or revenues, is significantly affected by some selected macroeconomic factors. Among these factors, country financial conditions are particularly relevant in the context of the present research, since they are closely related to the levels of public and private indebtedness as measured by debt-to-GDP ratios.

The Labor Market Outcomes of Austerity. Evidence for Europe

In this chapter we aim to provide an empirical characterization of the relationship between government spending and labor market variables for a group of Euro-area countries using data since the early nineties. To this end we estimate a panel Bayesian VAR model including fiscal, real and monetary variables. Government spending shocks are identified by imposing sign restrictions on the responses of selected variables. We find that unemployment multipliers are heterogeneous across countries and government spending tools. The unemployment multiplier is large in countries like Spain and Germany and small in Italy. In light of the large public investment projects promoted in Spain and of the structural reforms approved in Germany in the early 2000s, we are led to conclude that a combination of institutional reforms and public infrastructure investment projects can strengthen the link between fiscal policy and jobs.

Can (And Should) Germany Do It? Spillovers of German Fiscal Policies in the Euro Area

In recent years, also in light of the economic and financial crisis that has affected Euro-area countries, the German government has received repeated calls for expansionary fiscal policies. Indeed, Germany exhibits both a conspicuous surplus in the current account and fiscal space. So far these calls have met with rather limited success. However, at this stage, we still lack firm evidence about the dynamic effects of German fiscal shocks on output of other Euro-area economies. In this chapter we therefore undertake an empirical investigation using a panel VAR which allows us to model cross-country interdependences and to study dynamic linkages. We show that a positive government spending shock in Germany has notable effects on national output and, moreover, exerts significant spillover effects on the other Euro-area countries. We also find that the government spending multiplier is greater than one and close to values found in the literature for investigations concerning the United States.

A Further Look To Macroeconomic Outcomes of Fiscal Austerity in High Debt Countries

According to the results presented in Chap. 4, fiscal policy exhibits the traditional Keynesian sign in a group of southern Euro-area economies, i.e. Greece, Italy and Portugal, affected by high public debt. Instead, a non-Keynesian sign was detected in another group of countries, i.e. Ireland, Nerherlands and Spain, characterized by high private debt over the EMU period. In this chapter we aim to give a closer look to the dynamics of domestic output in response to contractionary fiscal shocks. To this end, we estimate VAR models at the national level and adopt an alternative identification strategy, based on sign restrictions. We also see this investigation as a robustness analysis for the main results of the previous chapter. We focus on the response of private consumption, typically the largest component of aggregate demand, to domestic government spending shocks. We find the largest output multipliers, but of opposite sign, respectively in Greece and Ireland. Thus, the conclusion is that the main findings of the previous chapter are largely confirmed.