Reference

Patrick Fève, and Jean-Guillaume Sahuc, In search of the transmission mechanism of fiscal policy in the Euro area, IDEI Working Paper, n. 840, November 7, 2014.

Abstract

Hand-to-mouth consumers and Edgeworth complementarity between private consumption and public expenditures are two competing mechanisms that were put forward by the literature to investigate the effects of government spending. Using Bayesian prior and posterior analysis and several econometric experiments, we find that a model with Edgeworth complementarity is a better representation for the transmission mechanism of fiscal policy in the euro area. We also show that a small change in the degree of Edgeworth complementarity has a large impact on the estimated share of hand-to-mouth consumers. These findings are robust to a number of perturbations.

Keywords

Fiscal multipliers; DSGE Models; Hand-to-Mouth; Edgeworth Complementarity; Euro Area; Bayesian Econometrics;

JEL codes

  • C32: Time-Series Models • Dynamic Quantile Regressions • Dynamic Treatment Effect Models • Diffusion Processes
  • E32: Business Fluctuations • Cycles
  • E62: Fiscal Policy

Research partnership

Macroeconomy