European Business Schools Librarian's Group

ESSEC Working Papers,
ESSEC Research Center, ESSEC Business School

No WP1209: The spending multiplier in a time of massive public debt : the euro area case

Radu Vranceanu () and Damien Besancenot ()
Additional contact information
Radu Vranceanu: ESSEC Business School, Postal: Avenue Bernard Hirsch - B.P. 50105, 95021 CERGY PONTOISE Cedex, FRANCE
Damien Besancenot: University of Paris 13 and CEPN

Abstract: This paper argues that in Euro-area economies, where the ECB cannot bail-out …nancially distressed governments, the …scal multiplier is adversely a¤ected 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 e¤ectiveness of …scal spending is adversely a¤ected by the amount of public debt; for a debt-to-GDP ratio above 150% the impact on growth of the …scal stimulus turns negative.

Keywords: Fiscal multiplier; Euro-area; Public debt; Illiquidity; the Great Recession

JEL-codes: C23; E62; G01

13 pages, First version: February 11, 2012. Revised: February 11, 2012. Earlier revisions: February 11, 2012, February 11, 2012.

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