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

Fève, Patrick and Sahuc, Jean-Guillaume (2017) In search of the transmission mechanism of fiscal policy in the Euro area. Journal of Applied Econometrics, 32 (3). pp. 704-718.

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Identification Number : 10.1002/jae.2517


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.

Item Type: Article
Language: English
Date: April 2017
Refereed: Yes
Uncontrolled Keywords: Fiscal multipliers, hand-to-mouth, Edgeworth complementarity, DSGE-VAR, Euro area, Bayesian econometrics
JEL Classification: C32 - Time-Series Models
E32 - Business Fluctuations; Cycles
E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 21 Jul 2016 11:45
Last Modified: 02 Apr 2021 15:53
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