Fiscal Policy Multipliers in the EU During the Credit Crisis: A DSGE Analysis

Abstract

This paper uses a multi region DSGE model with collateral constrained households and residential investment to examine the effectiveness of fiscal policy stimulus measures in a credit crisis. The paper explores alternative scenarios which differ by the type of budgetary measure, its length, the degree of monetary accommodation and the level of international coordination. It is found that an increase in households facing credit constraints and the fact that the zero lower bound on nominal interest rates has become binding both increase the effectiveness of temporary fiscal stimulus measures.