Public Investment and Monetary Policy Stance in the Euro Area

58 Pages Posted: 8 Dec 2017

See all articles by Lorenzo Burlon

Lorenzo Burlon

European Central Bank (ECB); Bank of Italy

Alberto Locarno

Bank of Italy

Alessandro Notarpietro

Bank of Italy

Massimiliano Pisani

Bank of Italy

Date Written: December 5, 2017

Abstract

This paper evaluates the macroeconomic impact of a programme for public infrastructure spending in the euro area (EA) under alternative assumptions about funding sources and the monetary policy stance. The quantitative assessment is made by simulating a dynamic general equilibrium model of a monetary union with region-specific fiscal policy. The main results are the following. First, EA-wide stimuli are more effective than unilateral (region-specific) stimuli. Second, under EA-wide stimulus, the fiscal multiplier is close to 2 if the forward guidance (FG) on the short-term policy rate holds. Third, if the monetary authority keeps down both the policy rates (with FG) and the long-term interest rates (with quantitative easing), the fiscal multiplier exceeds 3 at peak and investment spending is self-financing. Fourth, the financing method is relevant: debt financing, particularly under an accommodative monetary policy stance and if the sovereign spreads do not increase, is more growth-friendly than tax financing in the short-term (but not in the long-term). Fifth, the effectiveness of the fiscal stimulus is larger if government spending is directed towards productive goods and its implementation occurs efficiently and without delays.

Keywords: public investment, fiscal policy, monetary policy, euro area

JEL Classification: E52, E62, F41, F42

Suggested Citation

Burlon, Lorenzo and Locarno, Alberto and Notarpietro, Alessandro and Pisani, Massimiliano, Public Investment and Monetary Policy Stance in the Euro Area (December 5, 2017). Bank of Italy Temi di Discussione (Working Paper) No. 1150. Available at SSRN: https://ssrn.com/abstract=3084001 or http://dx.doi.org/10.2139/ssrn.3084001

Lorenzo Burlon

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Alberto Locarno

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Alessandro Notarpietro

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Massimiliano Pisani (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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