Public debt and state-dependent effects of fiscal policy in the euro area
SourceJournal of International Money and Finance
Google Scholar check
MetadataShow full item record
We investigate public debt related state dependencies of fiscal policy shocks for fifteen euro area economies during the period from 2000:Q1 to 2019:Q4. Our estimated impulse response functions suggest that the impact of fiscal policy shocks varies depending on the level of public debt characterizing an economy. Macroeconomic variables, notably output and consumption, go up in response to a positive government spending shock in the highdebt cross-sectional state, and these responses are distinctly different from those in the low-debt state. Using an extended model that considers both cross-sectional and timeserial high- and low-debt states we find that, for euro area economies, cross-sectional debt variation is more important than time-serial debt variation in driving differences in the responses of macroeconomic variables to government spending shocks.