This paper provides new evidence on the effects of fiscal policy shocks
in the euro area, focusing on changes in fiscal multipliers since the
mid-1980s. It applies Bayesian inference in a time-varying vector
autoregressive framework. We first show that the effectiveness of both
spending and tax based fiscal expansions in stimulating real GDP has
decreased substantially over the last twenty-four years. We then
disentangle the factors underlying the observed time variation in fiscal
multipliers. Overall, our evidence points towards rising government debt
as an important factor contributing to the decline in fiscal
multipliers. We find some support for the view that fiscal policy is
more effective in stimulating economic activity in periods of recession,
and that the impact of the business cycle comes through financial
factors. The stance of monetary policy does however not seem to have a
significant impact on the effectiveness of fiscal policy.