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Fiscal multipliers in a small euro area economy: How big can they get in crisis times?

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Listed:
  • Gabriela Castro

    (Economics and Research Department, Banco de Portugal)

  • Ricardo M. Felix

    (Economics and Research Department, Banco de Portugal)

  • Paulo Julio

    (Economics and Research Department, Banco de Portugal; and CEFAGE)

  • Jose R. Maria

    (Economics and Research Department, Banco de Portugal)

Abstract

Using PESSOA, a DSGE model for a small euro area economy, we analyze the size of fiscal multipliers associated with a large fiscal consolidation in "normal times" and in "crisis times." The crisis times scenario embodies a temporary increase in nominal rigidities and in financial frictions, purportedly better reflecting the underlying economic environment during the "Great Recession." Results show that impact multipliers are around 50-70 percent larger in crisis times for expenditure-based fiscal consolidations. A government consumption-based adjustment yields the highest impact multiplier (1.8 in crisis times vis-à-vis 1.2 in normal times). Revenue-based fiscal consolidations are also more recessive in crisis times, though the differences against normal times are less pronounced. Length: 37 pages

Suggested Citation

  • Gabriela Castro & Ricardo M. Felix & Paulo Julio & Jose R. Maria, 2014. "Fiscal multipliers in a small euro area economy: How big can they get in crisis times?," CEFAGE-UE Working Papers 2014_07, University of Evora, CEFAGE-UE (Portugal).
    • Handle: RePEc:cfe:wpcefa:2014_07
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    Cited by:

    1. José R. Maria & Paulo Júlio, 2017. "Output in the Portuguese post-2008 period: A general equilibrium narrative," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    2. José R. Maria & Paulo Júlio, 2017. "The Portuguese post-2008 period: A narrative from an estimated DSGE model," Working Papers w201715, Banco de Portugal, Economics and Research Department.
    3. Elva Bova & Violeta Klyviene, 2020. "Macroeconomic responses to fiscal shocks in Portugal," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 47(5), pages 1051-1069, April.
    4. Gabriela Castro & José R. Maria & Paulo Júlio, 2013. "Inside PESSOA -A Detailed Description of the Model," Working Papers w201316, Banco de Portugal, Economics and Research Department.
    5. Jasmin Sin, 2016. "The Fiscal Multiplier in Small Open Economy: The Role of Liquidity Frictions," IMF Working Papers 2016/138, International Monetary Fund.
    6. José R. Maria & Paulo Júlio, 2021. "Lessons from a finitely-lived agents structural model," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    7. Siming Liu, 2018. "Spending Multiplier during Sudden Stop Crises," 2018 Meeting Papers 226, Society for Economic Dynamics.
    8. Ian Borg, "undated". "Fiscal Multipliers in Malta," CBM Working Papers WP/06/2014, Central Bank of Malta.
    9. Laurent Maurin, 2019. "Weakness of investment in Portugal: what role do credit supply and fiscal consolidation shocks play?," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 18(1), pages 19-45, February.
    10. Liu, Siming, 2022. "Government spending during sudden stop crises," Journal of International Economics, Elsevier, vol. 135(C).
    11. Martha López, 2016. "Fiscal Multipliers, Oil Revenues and Balance Sheet Effects," Borradores de Economia 976, Banco de la Republica de Colombia.

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    Keywords

    Fiscal multipliers; crisis; DSGE model; euro area; monetary union; small open economy.;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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