In search of the transmission mechanism of fiscal policy in the Euro area

Patrick Fève, and Jean-Guillaume Sahuc


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;

JEL codes

  • 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.

Published in

Journal of Applied Econometrics, vol. 32, n. 3, April 2017, pp. 704–718