We study Italian public spending multipliers for the period 1998-2014 and we estimate the effects of final government consumption shocks on real private Gdp in a quarterly framework. We adopt an econometric approach based on a factor augmented VAR model (FAVAR): our guess is that this approach could represent a solution to solve the issue of endogeneity between macroeconomic and fiscal variables and to correctly specify the model, common problems in the fiscal multiplier and SVAR literature. The parsimonious use of control variables and degrees of freedom within a FAVAR model allows an investigation of the variability over time of fiscal multipliers, using expanding window regression from the beginning of 2008 and looking closely at what happened in the following years, in sub-samples having a small number of observations. We find three main results. First, in the long run the multiplier on Italian Gdp of a public consumption shock is close to 0.7 in median over the entire sample, and one-year cumulative multipliers are in a range 1.4-1.7. These results, though presenting some specificity, are coherent with those of the existing empirical literature. Second, estimated multipliers show significant changes during the analyzed period. We verify that multipliers seem to be higher in recessions and lower in expansions. Third, in the period starting from the 2012 fiscal consolidation episode and arriving until the end of the sample, our results show multipliers stabilized at lower levels as confronted with previous periods of slack. They maintain a positive sign, so our evidence is not supporting the so-called hypothesis of expansionary fiscal consolidation. But the reduction of multipliers during a period of fiscal restriction can be interpreted as evidence that the transmission of fiscal policy performs in slightly peculiar ways if consolidation brings, in a situation of weak public finance and sovereign crisis, a reduction of interest rates and an improvement of the state of confidence.
Causi, M. (2020). Fiscal multipliers of public consumption in Italy. In S.M.F.a.A.N. Pasquale De Muro (a cura di), Economics, policy and Law (pp. 13-46). Roma : RomaTrePress.
Fiscal multipliers of public consumption in Italy
Marco Causi
2020-01-01
Abstract
We study Italian public spending multipliers for the period 1998-2014 and we estimate the effects of final government consumption shocks on real private Gdp in a quarterly framework. We adopt an econometric approach based on a factor augmented VAR model (FAVAR): our guess is that this approach could represent a solution to solve the issue of endogeneity between macroeconomic and fiscal variables and to correctly specify the model, common problems in the fiscal multiplier and SVAR literature. The parsimonious use of control variables and degrees of freedom within a FAVAR model allows an investigation of the variability over time of fiscal multipliers, using expanding window regression from the beginning of 2008 and looking closely at what happened in the following years, in sub-samples having a small number of observations. We find three main results. First, in the long run the multiplier on Italian Gdp of a public consumption shock is close to 0.7 in median over the entire sample, and one-year cumulative multipliers are in a range 1.4-1.7. These results, though presenting some specificity, are coherent with those of the existing empirical literature. Second, estimated multipliers show significant changes during the analyzed period. We verify that multipliers seem to be higher in recessions and lower in expansions. Third, in the period starting from the 2012 fiscal consolidation episode and arriving until the end of the sample, our results show multipliers stabilized at lower levels as confronted with previous periods of slack. They maintain a positive sign, so our evidence is not supporting the so-called hypothesis of expansionary fiscal consolidation. But the reduction of multipliers during a period of fiscal restriction can be interpreted as evidence that the transmission of fiscal policy performs in slightly peculiar ways if consolidation brings, in a situation of weak public finance and sovereign crisis, a reduction of interest rates and an improvement of the state of confidence.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
