ABSTRACT

During the sovereign debt crisis, all euro countries have deployed "austerity packages", believing that they could regain the path of growth implementing structural reforms and cutting government spending. Such policies should have led to an initial decline in GDP followed by recovery and a reduction of the debt to gdp ratio. A key issue is the size of fiscal multipliers when the economy is in recession. We estimate a non-linear model allowing variations based on the state of the economy and we control for the macroeconomic characteristics across the Euro Area. The empirical evidence suggests that, an increase in government spending will be particularly effective to boost aggregate demand, increase private consumption and investment in the short-to-medium run, without raising the debt to gdp ratio but rather decreasing it.

Keywords: Fiscal Multipliers, State-Dependent, Fiscal Policy, Public Finance.
JEL codes: E32, E62.
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