Learning about fiscal multipliers during the European sovereign debt crisis: evidence from a quasi-natural experiment

Abstract

Identifying fiscal multipliers, i.e. the effect of discretionary fiscal actions on growth, is challenging. It requires comparing the realisation of growth after a fiscal action to a hypothetical growth path that would have prevailed in the absence of such action. Deriving the hypothetical path usually involves very strong assumptions. This paper helps to relax some of the assumptions, using a unique new dataset on the European Commission’s recommendations under the so-called excessive deficit procedure (EDP). These recommendations provide information on both output growth in a no-policy-change baseline forecast and an alternative forecast of growth incorporating the size of fiscal consolidation recommended under the EDP. A comparison of these two alternative scenarios allows us to infer country-specific fiscal multipliers implicitly applied by the Commission in its EDP recommendations for a sample of 24 countries over the period 2009-2015. Our results confirm Blanchard and Leigh (2013, 2014) presumption that fiscal multipliers used by forecasters were adjusted upwards during the European sovereign debt crisis, albeit starting from lower than commonly assumed levels. Contrary to Blanchard and Leigh (2013, 2014) we do not find evidence that the “true” ex-post fiscal multipliers systematically exceeded 1 in the early crisis years.

Ten Years After the Financial Crisis: What Have We Learned from the Renaissance in Fiscal Research?

“…The conclusions of Górnicka et al (2018) are consistent with some other analyses of the size of multipliers in the European fiscal consolidations. For example, Alesina, Favero, and Giavazzi (forthcoming) use their narrative data set of fiscal consolidation plans across OECD countries to study whether fiscal multipliers were greater in the immediate post-financial crisis years.…”

“…They concluded that the models used by forecasters assumed values of multipliers that were too small. Górnicka et al (2018) gathered data on the forecasters' assumed values of multipliers and found that they were very low, around 0.25.…”

Long‐term Effects of Fiscal Stimulus and Austerity in Europe

“…Coefficient δ on the contrary increases with time, from 1.0 (for years 2010/11) to 1.2 (2010/14). Note that further specifications with different panel dimensions after the crisis for both the SB and DFE case do not alter the general picture drawn so far – quite robust estimates with general weakening of the baseline effects in later crisis years, in line with the slowdown of consolidation potential learning effects of forecasters (Górnicka et al ., ) or the end of the downturn regime…”

“…Our findings are robust to a large set of perturbations. Yet, as a plausible qualification, we find a weakening of the effects in later crisis years, in line with the slowdown of consolidation, possible learning effects of forecasters (Górnicka et al ., ) or regime‐dependent multiplier effects (Baum, Poplawski‐Ribeiro and Weber, ; Auerbach and Gorodnichenko, ). Moreover, some Eastern European countries are influential outliers that weaken the relation to some extent.…”

The Effects of the Economic Adjustment Programmes for Greece: A Quasi-Experimental Approach

“…Among the authors who have analysed this issue, Gechert, Horn, and Paetz [46] considered that the negative impact of the policies in the short-and long-term was considerably underestimated. However, Górnicka et al [47] estimated lower fiscal multipliers for European economies, contradicting the negative effect found by Gechert, Horn, and Paetz [46]. Meanwhile, Paulus, Figari, and Sutherland [48] estimated the negative effect for Greece caused by fiscal austerity measures to be 2.68% on the aggregate demand.…”