This paper provides novel evidence on the time varying impact of government spending
shocks on output in Germany over the years 1970 to 2013. In a first step, I use an expectations-augmented vector autoregressive model with time varying parameters
(TVP-VAR) to show that fiscal multipliers are not stable over time but exhibit a ushaped
pattern. While multipliers fluctuate around 2 at the beginning and end of the sample, they are much smaller in between. In a second step, I discuss which factors determine the magnitude of German multipliers and hence explain the observed variation. It turns out that fiscal policy is more effective when business uncertainty is high but less in periods of financial market stress, while the state of the business cycle is of minor importance. Moreover, I find that fiscal sustainability is a crucial determinant of the multipliers. I conclude that policy recommendations based on average multipliers are misleading.
