Estimating tax and benefit multipliers in Europe

Abstract

This paper derives estimates for key fiscal multipliers in the major economies of Europe. Newly estimated consumption functions incorporating disaggregated wealth components facilitate a close examination of the impact of liquidity constraint effects on the transmission mechanism of fiscal policy. Analysis shows that multipliers are affected by the interest rate response to fluctuations in output and inflation and to the proportion of liquidity constrained agents in the economy. Multipliers which impact through the current value of real wealth display a positive relation with the degree of consumption smoothing, while multipliers which impact through current disposable income display a negative relation. Moreover, we gauge the impact on the multiplier response across countries when we assume that the proportion of liquidity constrained consumers is the same everywhere.