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Working Papers (2012), ESSEC Business School

The Fiscal Multiplier in a Time of Massive Public Debt: The Euro Area Case

VRANCEANU Radu , BESANCENOT D.

This paper argues that in Euro-area economies, where the ECB cannot bail-out financially distressed governments, the fiscal multiplier is adversely affected by the amount of public debt. A regression model on a panel of 26 EU countries over the period 1996-2011 shows that a 10 percentage point increase in the debt-to-GDP ratio is connected to a slowdown in annual growth rates of 0.28 percentage point. Furthermore, the effectiveness of fiscal spending is adversely affected by the amount of public debt; for a debt-to-GDP ratio above 150% the impact on growth of the fiscal stimulus turns negative.

VRANCEANU, R. and BESANCENOT, D. (2012). The Fiscal Multiplier in a Time of Massive Public Debt: The Euro Area Case. ESSEC Business School.

Keywords : #Dette-publique, #Politique-fiscale, #Risque-d'illiquidité, #Zone-euro