The Effects of Government Spending in the Eurozone

Abstract

Abstract Using a newly assembled rich dataset at the regional level, this paper provides novel empirical evidence on the effects of fiscal policy 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, and durable consumption. The labor share also increases, as do total hours worked driven by changes in the extensive margin (total employment), whereas the intensive margin (hours per worker) barely reacts. Contrary to the common policy narrative of strong positive spillover effects, we estimate only small regional fiscal spillovers. Finally, our findings reveal strong heterogeneities across economic sectors, states of the economy, and member states.