To React or Not? Fiscal Policy, Volatility and Welfare in the EU-3

Jim Malley, Apostolis Philippopoulos and Ulrich Woitek

No 312, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: This paper develops a dynamic stochastic general equilibrium model to examine the quantitative macroeconomic implications of counter- cyclical fiscal policy for France, Germany and the UK. The model incorporates real wage rigidity which is the particular market failure justifying policy intervention. We subject the model to productivity shocks and use either government consumption or investment to react to the output gap or the public debt-to-output ratio. If the object of fiscal policy is purely to stabilize output or debt volatility, then our results suggest substantial reductions can be obtained, especially with respect to output. In stark contrast, however, a formal general equilibrium welfare assessment of the volatility implications of these alternative instrument/target combinations reveals the welfare gains from active policy, measured as a share of consumption, to be very modest.

Keywords: Fiscal Policy; Welfare; Europe (search for similar items in EconPapers)
JEL-codes: E6 H5 (search for similar items in EconPapers)
Date: 2007-02
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: To React or Not? Fiscal Policy, Volatility and Welfare in the EU-3 (2007)
Working Paper: To React or Not? Fiscal Policy, Volatility and Welfare in the EU-3 (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:iewwpx:312

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