Fiscal Policy Shocks in the Euro Area and the US: An Empirical Assessment*


  • *

    Submitted August 2009.

  • The views expressed in this paper are those of the authors and do not necessarily reflect those of the European Central Bank (ECB), the Bank of Spain or the Eurosystem. The authors thank Pablo Hernández de Cos, Michele Lenza, Ad van Riet, seminar participants at the Bank of Spain, the ECB and the Working Group of Public Finance (WGPF) and two anonymous referees for useful comments.


We analyse the impact of fiscal policy shocks in the euro area as a whole, using a newly-available quarterly data set of fiscal variables for the period 1981–2007. To allow for comparability with previous results on euro-area countries and the US, we use a standard structural vector autoregressive (VAR) framework, and study the impact of aggregated and disaggregated government spending and net-tax shocks. In addition, to frame euro-area results, we apply the same methodology for the same sample period to US data. We also explore the sensitivity of the results to the inclusion of variables aiming to control for underlying financial and fiscal conditions. The main new findings are that: expansionary fiscal shocks have a short-term positive impact on GDP and private consumption, with government spending shocks entailing, in general, higher effects on economic activity than (net) tax reductions; output multipliers to government expenditure shocks are of similar size in the euro area and in the US; the persistence of a fiscal spending shock is higher in the US than in the euro area, which appears to be related to military spending in the US; and fiscal multipliers have increased over the recent past in both geographical areas.