The Euro-Area Government Spending Multiplier at the Effective Lower Bound

IMF Working Papers, June 28, 2019

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Model: factor-augmented interacted panel vector-autoregressive (Panel VAR) model of the Euro Area (EA).
Estimation: Bayesian methods.
Key construct: multipliers contingent on overall monetary policy stance, captured by a shadow monetary policy rate.
Econometric issues addressed: fiscal foresight and limited information.

Short run (one year):
- Finding: whether the fiscal shock occurs at the effective lower bound (ELB) or in normal times does not seem to matter for the size of the multiplier.
Medium run (three years):
- Finding: average multiplier is about 1 in normal times.
- Finding: average multiplier is between 1.6 and 2.8 at the ELB, depending on the specification.
- Statistical note: the difference between the two multipliers is distributed largely away from zero.

The multiplier is inversely correlated with the level of the shadow monetary policy rate.
EA data support that the multiplier is larger in periods of economic slack.
The shadow rate and the state of the business cycle are autonomously correlated with multiplier size.

Subject: Business cycles, Central bank policy rate, Economic growth, Expenditure, Financial services, Fiscal multipliers, Fiscal policy, Interest rate floor, Monetary policy.
Keywords: Business cycles, Central bank policy rate, cumulated multiplier, ELB regime, Euro Area, Factor models, Fiscal multiplier, Fiscal multipliers, Global, government spending multiplier, government spending shock, Interest rate floor, multiplier policymaker, one-year multiplier, Panel VAR, potential GDP, shadow rate, WP, Zero lower bound.