Jump-Starting the Euro Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery?
Sveriges Riksbank Working Paper Series No. 304
85 Pages Posted: 13 Aug 2015
Date Written: July 2015
We show that a fiscal expansion by the core economies of the euro area would have a large and positive impact on periphery GDP assuming that policy rates remain low for a prolonged period. Under our preferred model specification, an expansion of core government spending equal to one percent of euro area GDP would boost periphery GDP around 1 percent in a liquidity trap lasting three years, about half as large as the effect on core GDP. Accordingly, under a standard ad hoc loss function involving output and inflation gaps, increasing core spending would generate substantial welfare improvements, especially in the periphery. The benefits are considerably smaller under a utility-based welfare measure, reflecting in part that higher net exports play a material role in raising periphery GDP.
Keywords: Monetary Policy, Fiscal Policy, Liquidity Trap, Zero Bound Constraint, DSGE Model, Currency Union
JEL Classification: E52, E58
Suggested Citation: Suggested Citation