ECB RESEARCH-Hiking govt spending does little for economies

FRANKFURT, Jan 12 (Reuters) – Hiking government spending does little for economies, has a minimal impact on consumer spending, hits stock prices and can put off private investment, new European Central Bank research shows.

‘Shocks’ — or changes — in government spending also lead to a depreciation of the real effective exchange rate and have a mixed impact on house prices according to the ECB working paper, entitled ‘The Macroeconomic Effects of Fiscal Policy’.

The paper comes as several European countries draw up plans for massive extra stimulus packages to kick-start troubled economies on top of a 200 billion euro ($267.8 billion) Europe-wide package already agreed by leaders.

The ECB says working papers do not necessarily reflect the views of the central bank but based on data from the United States, Britain, Germany and Italy the paper’s authors, Antonio Afonso and Ricardo Sousa, listed a string of drawbacks from government spending swings.

‘The empirical evidence suggests that government spending shocks have, in general, a small effect on GDP,’ and ‘can have a ‘have a negative effect on private investment,’ they wrote.

Changes in spending also had, ‘little impact on private consumption and can have a varied effect on housing prices, lead to a quick fall in stock prices… lead to a depreciation of the real effective exchange rate.’

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