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PKSG Working Paper Series

Working Paper PKWP1607

Demand effects of fiscal policy since 2008

April 2016

Engelbert Stockhammer, Walid Qazizada, Sebastian Gechert

The Great Recession 2007-09 has led to controversies around the role of fiscal policy. Academically this has translated into renewed interest in the effects of fiscal policy. Several studies have since suggested that fiscal multipliers are substantially larger in downswings or depressions than in the upswing. In terms of economic policy reactions countries have differed substantially in the fiscal stance. It is an important open question how big the impact of these policies on economic growth has been. The paper uses the regime-dependent multiplier estimates by Qazizada and Stockhammer (2015) and by Gechert and Rannenberg (2014) to calculate the demand effects of fiscal policy for Germany, USA, UK, Greece, Ireland, Italy, Portugal and Spain since 2008. This allows assessing to what extent fiscal policy explains different economic performances across countries. We find expansionary fiscal policy in 2008/09 in all countries, but since 2010 fiscal policies have differed. While the fiscal impact was roughly neutral in Germany, the UK, and the USA, it was large and negative in Greece, Ireland, Italy, Portugal, and Spain.

Keywords: multiplier, fiscal policy, austerity, recession

JEL classification: C36: Multiple or Simultaneous Equation Models: Instrumental Variables (IV) Estimation E62: Fiscal Policy

Download: Working Paper PKWP1607