This paper applies the DSGE-VAR methodology to assess the size of fiscal multipliers in the data and the relative contributions of two transmission mechanisms of government spending shocks, namely hand-to-mouth consumers and Edgeworth complementarity. Econometric experiments show that a DSGE model with Edgeworth complementarity is a better representation of the transmission mechanism of fiscal policy as it yields dynamic responses close to those obtained with the flexible DSGE-VAR model (i.e. an impact output multiplier larger than one and a crowding-in of private consumption). The estimated share of hand-to-mouth consumers is too small to replicate the positive response of private consumption.
Fiscal multipliers; hand-to-mouth; Edgeworth complementarity; DSGE-VAR; Euro area; Bayesian econometrics;
- C32: Time-Series Models • Dynamic Quantile Regressions • Dynamic Treatment Effect Models • Diffusion Processes
- E32: Business Fluctuations • Cycles
- E62: Fiscal Policy
Patrick Fève, and Jean-Guillaume Sahuc, “In search of the transmission mechanism of fiscal policy in the Euro area”, TSE Working Paper, n. 14-536, November 7, 2014, revised March 2016.
Patrick Fève, and Jean-Guillaume Sahuc, “In search of the transmission mechanism of fiscal policy in the Euro area”, Journal of Applied Econometrics, vol. 32, n. 3, April 2017, pp. 704–718.
Journal of Applied Econometrics, vol. 32, n. 3, April 2017, pp. 704–718