Regional multipliers across the Italian regions

Abstract

This paper estimates the multipliers of different types of government spending in the 20 Italian administrative regions throughout 1994–2016. To this end, we use a Bayesian random effect panel vector autoregressive model, which enables us to estimate region-specific multipliers. Our results highlight that the EU structural funds, compared to the other types of government spending, provide the largest and most widely spread GDP multipliers, whereas the effectiveness of nationally funded government investment and government consumption shocks is limited to certain regions. We also find that there exists a fair degree of substitutability between EU structural funds and other expenditure variables, which runs counter to the principle of additionality of the EU cohesion policy. Moreover, at least for some regions, private investment is crowded in by shocks to government consumption and EU structural funds and crowded out by shocks to nationally funded government investment. An exploratory analysis of the distribution of multipliers across regions and expenditure types suggests that multiplier values are positively associated with the amount of unused resources as well as with the region size.