In Search of the Transmission Mechanism of Fiscal Policy in the Euro Area

Abstract

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.

US Business Cycle Dynamics at the Zero Lower Bound

“…Our prior mean is close to the roughly 31 % reported by Kaplan et al (2014) as the combined share of poor and wealthy hand-to-mouth agents in the US. This is also within close range to estimates by Coenen and Straub (2005) and Fève and Sahuc (2017), but slightly higher than the value estimated by Coenen et al (2013).…”

The Missing Link: Monetary Policy and The Labor Share

“…These techniques have been used to compute the prior sensitivity of fiscal multipliers implied by different DSGE models, seeLeeper, Traum, and Walker (2015) andFéve and Sahuc (2014).…”

Wages and inflation in Mexican manufacturing. A two-period comparison: 1994-2003 and 2007-2016

“…In this regard, during the 1950-1960's substantial studies were made by Phillips (1958), Dicks-Mireaux and Dow (1959), Klein, Ball, Hazlewood and Vandome (1961), and Lipsey and Steuer (1961). Continuation over similar research lines are presented in Stigler (1966), Rotemberg (1987), Merton and Upton (1988), Hall and Taylor (1989), Ball and Mankiw (1995), Romer (1996), Pujol and Griffiths (1997), Varian (1999), Galí and Gertler (1999), Woodford (2003), Christiano et al, (2005), Uhlig (2005), Galí et al, (2007), Galí (2008), Coibion and Gorodnichenko (2013), Mankiw (2015), Féve and Sahuc (2017), and Cantore et al, (2021).…”