A Spatial General Equilibrium Analysis of Local Public Spending Multipliers in the European Union Regions

Abstract We use a spatial dynamic general equilibrium model calibrated for 235 regions in the European Union to identify the determinants of regional multipliers associated with government spending shocks. We show how the size of the local fiscal spending multipliers is determined by the response of different GDP components, and we simulate several scenarios to explore the importance of the way in which the increased spending is financed, as well as trade openness and labour market tightness. We use econometric estimates to identify the regional characteristics that determine the size of the multipliers based on the simulation outcomes. Our results suggest that higher trade and savings generally reduce the effectiveness of fiscal interventions, while higher unemployment increases it. Our methodology provides a full set of multipliers at NUTS 2 level that can be traced back to economic fundamentals, which can be modified in different scenarios for robustness purposes. These findings provide valuable policy insights relevant to the debate on the effectiveness of fiscal policy in Europe.