The Impact of Government Expenditures on Imports within the Euro Area

Southern European countries emphasize the importance of increasing government expenditures of northern European countries as it will boost their internal demand for imported goods originating from southern European countries. This paper uses a vector error correction model to analyze this effect. Three internal demand components (government expenditures, private consumption and private investments) of Germany are regressed upon the volume of imports originating from the four peripheral countries, including Spain, Greece, Ireland and Portugal. The main conclusion of this paper is that only government expenditures and private consumption have a significant effect. However, the results should be interpreted carefully since there is evidence that the model is misspecified.