5. A Further Look To Macroeconomic Outcomes of Fiscal Austerity in High Debt Countries

According to the results presented in Chap. 4, fiscal policy exhibits the traditional Keynesian sign in a group of southern Euro-area economies, i.e. Greece, Italy and Portugal, affected by high public debt. Instead, a non-Keynesian sign was detected in another group of countries, i.e. Ireland, Nerherlands and Spain, characterized by high private debt over the EMU period. In this chapter we aim to give a closer look to the dynamics of domestic output in response to contractionary fiscal shocks. To this end, we estimate VAR models at the national level and adopt an alternative identification strategy, based on sign restrictions. We also see this investigation as a robustness analysis for the main results of the previous chapter. We focus on the response of private consumption, typically the largest component of aggregate demand, to domestic government spending shocks. We find the largest output multipliers, but of opposite sign, respectively in Greece and Ireland. Thus, the conclusion is that the main findings of the previous chapter are largely confirmed.