The Effect of the European Excessive Deficit Procedure on Fiscal Spending Multipliers

Abstract

The Excessive Deficit Procedure (EDP) is the corrective arm of European fiscal governance. Using a panel of European countries and state-dependent local projections, we document that cumulative fiscal spending multipliers are larger for countries in the EDP. This result is driven by lower interest rates and substantial crowding-in of private investment in response to a positive government spending shock. Multipliers in the EDP are even larger in times of weak fiscal position or recessionary episodes, indicating that the procedure is particularly effective. We show that the EDP is not simply a proxy for these times. In addition, we find that policy makers underestimate fiscal multipliers in real time. The results suggest that the EDP is functional and increases the effectiveness of fiscal stimulus.