The EA-BDF Model and Government Spending Multipliers in a Monetary Union

Pierre Aldama, Guillaume Gaulier, Matthieu Lemoine, Robert Pierre-Antoine, Turunen Harri and Zhutova Anastasia

Working papers from Banque de France

Abstract: We develop in this paper a new two-country model of the euro area (EA-BDF), based on the large-scale FR-BDF model of France and a new medium-scale block of the rest of the euro area (STREAM). This new block follows an approach close to FR-BDF, being a semi-structural model with the same type of adjustment costs and that we can use with different types of expectations. Both countries of EA-BDF share a common endogenous monetary policy and, thanks to our multi-country setup, we can deal with both symmetric and asymmetric shocks. Our illustrations about the effects of a government spending shock in a monetary union deliver two key results, which are robust whatever the type of expectations. First, by studying symmetric and asymmetric shocks on government spending, kept constant for 2 years, we find that, at this 2-year horizon, trade spillovers would compensate monetary policy spillovers within the euro area. Second, we also find, in the case of a symmetric shock, that the government spending multiplier is smaller under a monetary policy rule based on price-level targeting than on inflation targeting.

Keywords: Semi-Structural Modeling; Expectations; Monetary and Fiscal Policies (search for similar items in EconPapers)
JEL-codes: C54 E37 (search for similar items in EconPapers)
Pages: 79 pages
Date: 2022
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:883

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