Learning about fiscal multipliers during the European sovereign debt crisis: evidence from a quasi-natural experiment

Abstract

SUMMARYIdentifying fiscal multipliers, that is, the effect of discretionary fiscal actions on growth, is challenging. It requires comparing the realization of growth after a fiscal action to a hypothetical growth path that would have prevailed in the absence of such action. Deriving the hypothetical path usually involves very strong assumptions. This paper helps to relax some of the assumptions, using a unique new data set on the European Commission’s recommendations under the so-called excessive deficit procedure (EDP). These recommendations provide information on both output growth in a no-policy-change baseline forecast and an alternative forecast of growth incorporating the size of fiscal consolidation recommended under the EDP. A comparison of these two alternative scenarios allows us to infer country-specific fiscal multipliers implicitly applied by the Commission in its EDP recommendations for a sample of 24 countries over the period 2009–2015. Our results confirm Blanchard and Leigh’s (2013, 2014) presumption that fiscal multipliers used by forecasters were adjusted upwards during the European sovereign debt crisis, albeit starting from lower than commonly assumed levels. Contrary to Blanchard and Leigh (2013, 2014), we do not find evidence that the ‘true’ ex-post fiscal multipliers systematically exceeded 1 in the early crisis years.