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Keywords:

  • government spending shocks;
  • real wages;
  • panel VAR;
  • European Monetary Union

ABSTRACT

This paper studies the impact of fiscal shocks in a panel of eleven euro area member countries. It contributes to the existing literature by providing new empirical evidence on the effects of different types of spending shocks on real wages. The main finding is that an increase in government spending raises the real wage. However, its magnitude depends on the spending type. Shocks to government investment and to the number of public employees generate responses that are at the extremes of the wage response spectrum. The former produces the greatest effect, whereas the latter has zero impact. Copyright © 2011 John Wiley & Sons, Ltd.