Fiscal policy, pricing frictions and monetary accommodation

Expansionary fiscal consolidations in Europe: New evidence

Fabio Canova and Evi Pappa

Economic Policy, 2011, vol. 26, issue 68, 555-598

Abstract: This paper empirically investigates whether the theoretical conditions for government expenditure expansions to be effective, hold for the data. We ask whether the necessary conditions for fiscal effectiveness are relevant on average, and in special circumstances that capture features of the recent crisis. Fiscal policy can be an effective countercyclical tool if monetary policy accommodates the fiscal expansion, if expectations about future output growth and inflation are constant, and if structural relationships are invariant to the policy change. Recent expansions are unlikely to produce large output multipliers or have important debt or inflation effects. Credible deficit and debt reduction schemes can produce sizeable output multipliers.— Fabio Canova and Evi Pappa

Date: 2011
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Working Paper: Fiscal Policy, Pricing Frictions and Monetary Accommodation
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Persistent link: https://EconPapers.repec.org/RePEc:oup:ecpoli:v:26:y:2011:i:68:p:555-598.

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