Fiscal space in the COVID-19 pandemic

Patrick Hürtgen

Applied Economics, 2021, vol. 53, issue 39, 4517-4532

Abstract: The ‘Great Lockdown’ in response to the COVID-19 pandemic has led to a severe world-wide economic crisis. In the euro area countries sovereign debt-to-GDP ratios are on the rise and reductions in expected fiscal surpluses raise sustainability concerns amongst investors. This paper provides novel estimates of non-linear state-dependent fiscal limits for the five largest euro area countries. Within the DSGE model I build a COVID-19 scenario calibrated to match the decline in real GDP growth forecasts between February and April 2020 and the fiscal stimulus packages announced until the end of March 2020. On average, fiscal space contracts by 58.4% of national GDP.

Date: 2021
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DOI: 10.1080/00036846.2021.1904121

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