Tobias Cwik and Volker Wieland Goethe University of Frankfurt, CFS and CEPR

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Tobias Cwik and Volker WielandGoethe University of Frankfurt, CFS and CEPR

Keynesian Government Spending Keynesian Government Spending

Multipliers and Spillovers Multipliers and Spillovers

in the Euro Areain the Euro Area

Keynesian Government Spending Keynesian Government Spending

Multipliers and Spillovers Multipliers and Spillovers

in the Euro Areain the Euro Area

Banco de España Research ConferenceMadrid, February 25, 2010

Interactions between Monetary and Fiscal Policies

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Heated Debate over Major Policy Experiments

U.S.A.: 2008: tax rebates, 2009: ARRAAmerican Recovery and Reinvestment Act, $ 787bln

Europe: 2008/9: EERP The European Economic Recovery Plan, National

plans: for example, in Germany, Konjunkturpaket 1 und 2

Major discretionary fiscal policy initiatives with possibly large impact on economic welfare.

Heated debate in policy circles and academia: Convictions abound, competitors/opponents are easily dismissed.

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Quantitative Analysis and Policy Advice

Investigate the actual policy experiments, not standardized shocks.

Consider competing, empirically-based views of the structure of the economy (i.e. account for model uncertainty).

Account for a realistic range of scenarios (monetary-fiscal interactions, zero bound effect, implementation lags, …).

Policy advice should be robust! Develop decision criteria that account for competing model and realistic scenarios.

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Some Questions

1. How big is the actual € area stimulus? Which countries?

2. What GDP effects should we expect in the euro area? Is there a Keynesian multiplier effect or crowding out? Account for model uncertainty and realistic

scenarios.

3. What are the spillover effects between countries in the union? We make use of a model archive that offers a

new platform for a comparative approach to model-based policy analysis.

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1. How big is the Euro area stimulus?

Total Package in %GDP: 2009: 1.01 2010: 0.85

Expenditures in %GDP: 2010: 0.58 2010: 0.22

German stimulus 50 % of EU 11

German gov. expenditures: 43% of EU 11German package %GDP: 3.37% (09: 1.44% 10: 1.93% )

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EU 11 Stimuli

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2. What is the GDP effect of the Stimulus? Multipliers?

Focus on government spending which promises the largest multiplier.

Model uncertainty: consider wide range of competing Keynesian-style models, identical monetary policy reaction.

Alternative scenarios: (1) Actual spending plan (Immediate

implementation with slight phase-in) (2) Implementation delay. (3) Zero bound: notional interest rate target

negative fiscal stimulus boosts output, but output increase does not immediately lead to policy tightening.

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Model Uncertainty & Robustness

New-Keynesian DSGE models: - Smets and Wouters 2003, (ECB), Euro Area

- Laxton&Pesenti 2003 (IMF), Euro Area +Cz.Rep.

- EU- Euro area model 2009 (EU-QUEST) (35% liquidity-constrained consumers)

New-Keynesian- Taylor G-7 model, 1993

Old-Keynesian- ECB Area Wide model, 2004

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New-Keynesian DSGE Models of IMF and EU Researchers

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NK-Models

The increase in GDP quickly produces a permanent contraction in private sector saving and consumption.

Households anticipate that government debt incurred needs to be paid off with interest by raising taxes in the future. (SW-Small-IMF assume lump-sum/ non-distortionary taxes)

Interest rates rise. Crowding out of investment and consumption. No multiplier.

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Taylor and ECB-AWM Models

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Scenario (2): Implementation Lag

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GDP Effect with Implementation Lag

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Consumption and Investment

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Consumption and Investment

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Scenario (3): Zero Bound and Monetary-Fiscal Policy Interaction

So far interest rates are set according to Gerdesmeier-Roffia (ECB) rule used also in Kuester-Wieland (JEEA, June, 2010)

Recession, nominal rate bounded at zero, central bank want to lower further notional negative interest rate target as long as it is below zero, fiscal stimulus boosts GDP without triggering policy tightening.

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Zero Interest Rate Floor

Cash is a zero-interest bearing asset Technically:

nonlinear RE model rational anticipation that zero interest floor

becomes binding for 1 yearsimulation: keep interest rate constant for 1

year, then return to Gerdesmeier-Roffia rule.

Endogenous recession and zero bound (see example later).

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Zero Bound effective in 2009

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Decision Criteria: Robustness under Model Uncertainty

How to weigh the models? Bayesian probabilities, equal weights,

Minimax, ambiguity aversion (see also Kuester-Wieland 2010)

Here a simple criterion: cumulative 2-year or 4-year multiplier

negative or positive?

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Cumulative Effect(output net of government spending)

Crowding out dominates.

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3. Spillover Effects

German stimulus greater, almost like ARRA for 2 years.

Do the other countries benefit, as supporters of fiscal stimulus predicted?

Need at least a 3-country model. We‘ll use Taylor (1993), G-7.

Impact of German stimulus on France and Italy

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Spillovers of German Package

No spillover, or even negative. What effects are present?

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Spillovers of German Package

3 Effects:Direct positive demand effect on Italian and

French exports. Significant in empirical export demand equation.

Indirect negative effect 1: upward pressure on euro area interest rates.

Indirect negative effect 2: euro real appreciation.

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Counterfactual: Flexible Exchange Rates between Germany, France and Italy

Positive spillover once exchange rate effect reinforces it.

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Conclusions

Myth: „German package small“ Spending multipliers: Confirms US analysis

with multiple New Keynesian models, Concentrated in 2 years, slightly greater

multipliers. Implementation lags mean effect in 09 Q1-2

negative. 1-year constant rate increases multiplier little. 2-4 years, signficant crowding-out. Intra-euro area direct-demand spillovers

dominated by negative interest-rate and exchange-rate effects.

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Appendix 1: What if ARRA applied in € Area?

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Counterfactual - What if ARRA implemented in Euro Area?

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Appendix 2: Recession and zero bound

Baseline scenario: Simulate SW model with actual US data up

to and including 2009:Q1. then project forward from 09:Q1 onwards

with and without fiscal stimulus. Compute difference. with Fed following Taylor rule, the zero

bound is not binding when simulating the SW 07 model. Use SW rule instead.

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09:Q1 Deep recession and zero bound

Counterfactual: consider deeper recessions. 1.5x the 09:Q1 shock, and 2x the 09:Q1

shock. The first scenario is similar to CCTW 1 year

constrained.

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Projection and Realization: The Beginning of the Recovery

09:Q1:

Blue dashed: with ARRA spending.

Black: no ARRA spending

Red dashed: Actual

Realizations Q2-Q4

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Appendix 3: Government Spending Shocks: Evidence from Reduced-Form Regressions

Ramey (2009) says: “literature remains divided on central

questions such as whether the GDP effect is greater than unity”

“studies using VAR techniques in which identification is achieved by assuming that government spending is pre-determined within the quarter typically find a larger effect of government spending on GDP, while studies using the Ramey-Shapiro “war dates” indicate a smaller GDP effect and crowding-out of consumption.”

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Range of Estimates

VAR-based estimates: Gali et al (2007), up to 1.7 Mountford & Uhlig (2009), below unity

Other approaches to identification: Ramey (2009), 0.6-0.8 on defense

spending when WWII is excluded, with WWII closer to unity.

Barro & Redlick (2009), 0.6-0.7, defense spending including WWII, closer to 1 if unempoyment > 12%, non-defense spending multiplier insignificant.

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Anticipations Matter.

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Appendix 4: Eine Idee zur Exitstrategie

Ein Konsumstimulus der etwas anderen Art.

Problem bisher: Staatsausgabenerhöhung verdrängt privaten Konsum und Investitionen.

Alternative: Ankündigung eines zukünftigen Sparpakets.

Beispiel – USA American Savings Pact (ASPA = -2.5 x ARRA start in 2010:Q3)

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ARRA versus ASPA ("American Stability PAct")SW model (2007), Taylor rule after 1-year constant interest rate

-1,8

-1,3

-0,8

-0,3

0,2

0,7

1,220

09q1

2009

q3

2010

q1

2010

q3

2011

q1

2011

q3

2012

q1

2012

q3

2013

q1

2013

q3

2014

q1

2014

q3

2015

q1

2015

q3

2016

q1

Quarters

Per

cent

of G

DP

ASPA Saving

ARRA Spending

GDP under ASPA

GDP under ARRA

Gespart: 2.5 mal Ausgaben unter ARRA

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Consumption: ARRA versus ASPA SW model (2007), Taylor rule after 1-year constant interest rate

-0,6

-0,4

-0,2

0

0,2

0,4

0,6

0,8

1

1,220

09q1

2009

q3

2010

q1

2010

q3

2011

q1

2011

q3

2012

q1

2012

q3

2013

q1

2013

q3

2014

q1

2014

q3

2015

q1

2015

q3

2016

q1

Quarters

Per

cent

of G

DP

Consumption under ASPA

Consumption under ARRA

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Appendix 5: Ein Blick auf die Daten

Was hat sich zwischen 09:Q1 und 09:Q2 geändert?

Können wir daraus Schlüsse ziehen, bezüglich der Wirkung verschiedener Maßnahmen?

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U.S.A.: Quartalswachstum (siehe auch Wall Street Journal (U.S.), 17.9.09, Cogan, Taylor, Wieland.)

2009 Q1 2009 Q2 Differenz

BIP -6,4 -1 5,4

Konsum 0,44 -0,69 -1,13

Investitionen -8,98 -3,2 5,78

Bauten (nicht Wohn.) -2,28 -0,59 1,69

Ausruestungsinv. -3,01 -0,56 2,45

Lagerhaltungsaender. -2,36 -1,39 0,97

Wohnbauten -1,33 -0,66 0,67

Nettoexporte 2,64 1,6 -1,04

Staatsausgaben -0,52 1,27 1,79

Verteidigung -0,27 0,67 0,94

Nichtverteidig. (Bund) -0,06 0,15 0,21

Ausgaben (Staaten,Lokal) -0,19 0,44 0,63

Beiträge zu Quartalswachstum-

raten (annualisiert)

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€-Zone: Quartalswachstum (nicht annualisiert)

Beiträge zur Quartalswachstumsrate in Vorjahrespreisen

08 Q3 08 Q4 09 Q1 09 Q2Differenz 09 Q1 vs Q2

BIP Insgsamt -0,4 -1,8 -2,5 -0,1   2,4

Inländische Nachfrage 0,17 -0,7 -2,05 -0,79 1,26 

Investition (ohne Lagerh.) -0,29 -0,74 -1,12 -0,26 0,86 

Privater Verbrauch -0,01 -0,25 -0,29 0,1 0,39

Staatlicher Verbrauch 0,1 0,12 0,14 0,1 -0,04 

Lagerhaltungsänderung 0,38 0,18 -0,77 -0,72 0,05 

Nettoexporte -0,52 -1,11 -0,41 0,67 1,08 

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Deutschland 08 Q2 08 Q3 08 Q4 09 Q1 09 Q2 2009 Q2-Q1

 Bruttoinlandsprodukt -2,3 -1,3 -9,8 -14,1 1,3 15,4

 Konsum -0,9 0,8 -0,5 2,2 2,0 -0,2

  Privater Konsum -1,4 0,7 -1,0 1,5 1,7 0,2

  Staat. Konsum 0,5 0,1 0,4 0,8 0,3 -0,4

 Investitionen -4,1 3,5 -0,9 -6,0 -6,9 -0,9

  Anlageinvestitionen -1,8 0,5 -1,5 -5,9 0,6 6,4

  Ausrüstungsinv. -0,3 0,5 -1,2 -5,9 -0,1 5,8

  Bauinvestitionen -1,7 -0,2 -0,4 0,1 0,6 0,5

  Sonst. Anlagen 0,1 0,1 0,1 0,0 0,1 0,1

Vorratsveränderungen -2,2 3,1 0,7 -0,2 -7,5 -7,3

 Exporte 0,3 -0,2 -15,3 -18,8 -2,0 16,8

  Waren 1,0 -0,9 -14,5 -19,5 -1,4 18,1

  Dienstleistungen -0,7 0,7 -0,7 0,7 -0,6 -1,3

 Importe -2,4 5,5 -7,1 -8,4 -7,8 0,6

  Waren -2,7 5,8 -6,4 -8,8 -6,8 2,0

  Dienstleistungen 0,3 -0,3 -0,7 0,4 -1,0 -1,4

Beitrag zum BIP Wachstum (Quartalsraten, annualisiert)

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Deutschland: Investitionen (Staat vs Privat)

08 Q2 08 Q3 08 Q4 09 Q1 09 Q2 Differenz

 Investitionen -4,1 3,5 -0,9 -6,0 -6,9 -0,9

  Anlageinvestitionen -1,8 0,5 -1,5 -5,9 0,6 6,4

  Ausrüstungsinv. -0,3 0,5 -1,2 -5,9 -0,1 5,8

Ausrüst. Staat 0,0 -0,1 0,0 0,1 0,0 -0,1

Ausrüst Nicht-Staat -0,3 0,6 -1,2 -6,0 -0,1 5,9

Maschinen und Gerät 0,4 -0,6 0,0

Fahrzeuge -0,6 1,1 -1,3

  Bauinvestitionen -1,7 -0,2 -0,4 0,1 0,6 0,5

  Bau Staat -0,3 0,1 0,2 -0,2 0,2 0,4

Bau Nichtstaat Wohn. -1,1 -0,2 0,0 0,3 -0,1 -0,3

Bau Nichtst. Nichtw. -0,4 0,0 -0,5 0,1 0,5 0,4

  Sonst. Anlagen 0,1 0,1 0,1 0,0 0,1 0,1

  Sonst.Anlag. Staat 0,0 0,0 0,0 0,0 0,0 0,0

  S.Anlag. nichtStaat 0,1 0,1 0,1 0,0 0,1 0,1

Vorratsveränderungen -2,2 3,1 0,7 -0,2 -7,5 -7,3

Beitrag zum BIP Wachstum (Quartalsraten, annualisiert)