The Effects of Government Spending in the Eurozone

Abstract

Using a newly assembled rich dataset at the regional level, this paper provides novel empirical evidence on the fiscal transmission mechanism in the Eurozone. Our baseline estimates reveal a government spending relative output multiplier around 2, an employment multiplier of 1.4, and a cost per job created of approximately €30,000. Moreover, we find that a regional fiscal stimulus leads to a significant increase in private investment, productivity, durable consumption, and the labor share together with a significant rise in total hours worked driven by changes in the extensive margin (total employment), whereas the intensive margin (hours per worker) barely reacts. Contrarily to the common policy narrative of strong positive spillover effects, we estimate only small regional fiscal spillovers. Finally, our findings reveal strong heterogeneities across industries, states of the economy, and member states.

Publication
R&R at the Journal of the European Economic Association

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