Fiscal policy response to the COVID-19 pandemic in the euro area

We estimate the impact of fiscal measures adopted in response to the Covid-19 crisis at the euro area level, combining standard macroeconomic data with an index on the strictness of ‘lockdown style’ policies. Given the multitude of shocks occurred simultaneously during the pandemic, the fiscal stimulus is identified together with other supply- and demand-side shocks using a sign and zero restricted Bayesian vector autoregressive (VAR) model. Our results show that during the two years 2020-2021, public spending and revenue-side measures avoided a further reduction of GDP equal to 2.8 and 0.9 percentage points, respectively.