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Adalgiso Amendola, Mario di Serio, Matteo Fragetta, and Mr. Giovanni Melina
We build a factor-augmented interacted panel vector-autoregressive model of the Euro Area (EA) and estimate it with Bayesian methods to compute government spending multipliers. The multipliers are contingent on the overall monetary policy stance, captured by a shadow monetary policy rate. In the short run (one year), whether the fiscal shock occurs when the economy is at the effective lower bound (ELB) or in normal times does not seem to matter for the size of the multiplier. However, as the time horizon increases, multipliers diverge across the two regimes. In the medium run (three years), the average multiplier is about 1 in normal times and between 1.6 and 2.8 at the ELB, depending on the specification. The difference between the two multipliers is distributed largely away from zero. More generally, the multiplier is inversely correlated with the level of the shadow monetary policy rate. In addition, we verify that EA data lend support to the view that the multiplier is larger in periods of economic slack, and we show that the shadow rate and the state of the business cycle are autonomously correlated with its size. The econometric approach deals with several technical problems highlighted in the empirical macroeconomic literature, including the issues of fiscal foresight and limited information.
Mario di Serio, Matteo Fragetta, and Mr. Giovanni Melina
We compute government spending multipliers for the Euro Area (EA) contingent on the interestgrowth differential, the so-called r-g. Whether the fiscal shock occurs when r-g is positive or negative matters for the size of the multiplier. Median estimates vary conditional on the specification, but the difference between multipliers in the negative and positive r-g regimes differs systematically from zero with very high probability. Over the medium run (5 years), median cumulated multipliers range between 1.22 and 1.77 when r-g is negative, and between 0.51 and 1.26 when r-g is positive. We show that the results are not driven by the state of the business cycle, the monetary policy stance, or the level of government debt, and that the multiplier is inversely correlated with r-g. The calculations are based on the estimates of a factor-augmented interacted panel vector-autoregressive model. The econometric approach deals with several technical problems highlighted in the empirical macroeconomic literature, including the issues of fiscal foresight and limited information.
Adalgiso Amendola, Mario di Serio, Matteo Fragetta, and Mr. Giovanni Melina

captures a series of unconventional measures including the Asset Purchase Program (APP) and forward guidance. 10 The choice of regimes translates into a number of choices as far as shadow rate percentiles are concerned. We pick the 77th percentile (2.75 percent; 2003q2) as a representative of the normal times regime, being the closest to the average shadow rate for that period (2.82 percent); and the 16th percentile (-2.23 percent; 2015q3) as a representative of the ELB regime, again being the closest to the average shadow rate for that period (-2.29 percent

Mario di Serio, Matteo Fragetta, and Mr. Giovanni Melina

negative effect that GDP growth has on r – g . The literature has investigated the size of fiscal multipliers from many different angles, focusing recently on the state dependency of multipliers on a variety of macroeconomic indicators (the business cycle, effective lower bound (ELB) regimes, the level of public debt, among others). However, to our knowledge, there is no contribution linking the size of the fiscal multiplier to r – g . This paper deals with this matter from an empirical viewpoint by posing the following research question: does the level of r – g