Economic Effectiveness of Economic Stimulus Packages in 2008 and 2009

Tasks

We examine the economic effectiveness of the economic stimulus packages in Germany in the years 2008 and 2009. The German government set up two important economy stimulus packages to counteract the negative influence of the strongest recession since 1950. We aim at identifying the effects of the fiscal policy measures on the German economy.

The research project follows two pillars. In the first pillar we examine how fiscal policy measures influence the German business cycle. We discuss the role of business confidence as a transmission channel for fiscal policy measures. In the second pillar we examine the effectivness of fiscal aid for additional investment in the German municiapalities and states. We also investigate how budget composition influences economic growth.

Methods

We examine the effects of fiscal policy measures on the German business cycle using vector autoregressive regressions. We calculate fiscal multipliers. We discuss to what extent fiscal policy measures can stabilize the economy via the transmission channel of business expectations.

We examine how the economic stimulus packages in 2008 and 2009 influenced employment in the German municipalities and states using cross-section and panel data techniques. We examine the influence of budget composition on economic growth using panel data techniques.

Data and other sources

German State Statistical Offices, German Federal Statistical Office.

Results

The first chapter provides evidence on the time varying impact of government spending shocks on output in Germany. Firstly, a vector autoregressive model with time varying parameters is used to show that fiscal multipliers vary across periods. Secondly, the chapter discusses which factors determine the magnitude of fiscal multipliers and explain the observed variation. The study comes to the conclusion that policy recommendations based on average multipliers are misleading and that determinants such as business uncertainty should be taken into account. The second chapter explores how business uncertainty affects the effectiveness of fiscal policy in greater detail. Measures of business uncertainty are derived from the firm-level data of the Ifo Business Climate Survey. The uncertainty measures are subsequently interacted with the parameters of a structural vector auto regression to produce state-dependent spending multipliers. The results show that fiscal policy – in contrast to monetary policy – is most effective when uncertainty is high and hence is a better tool to stimulate the economy during volatile episodes.

The third chapter investigates fiscal forecasts at the German state level. The research question was how election cycles influence forecasts of public spending, tax revenues and net lending. The results show that eastern German state governments systematically underestimated the size of government in pre-election years. Chapter four examines the allocation of fiscal resources from the stimulus package “Konjunkturpaket II”. We investigate whether politicians allocated fiscal resources for investment projects to their home towns. The results show that the home towns of German state MPs did indeed obtain more fiscal resources.