Jump-Starting the Euro-Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery?

Olivier Blanchard, Christopher Erceg and Jesper Lindé

NBER Macroeconomics Annual, 2017, vol. 31, issue 1, 103 - 182

Abstract: We show that a fiscal expansion by the core economies of the euro area would have a large and positive impact on periphery GDP assuming that policy rates remain low for a prolonged period. Under our preferred model specification, an expansion of core government spending equal to 1% of euro-area GDP would boost periphery GDP by over 1%in a liquidity trap lasting three years, nearly half as large as the effect oncore GDP. Accordingly, under a standard ad hoc loss function involving output and inflation gaps, increasing core spending would generate substantial welfare improvements, especially in the periphery. The benefits are considerably smaller under a utility-based welfare measure, reflecting in part that higher net exports play a material role in raising periphery GDP.

Date: 2017
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Related works:
Chapter: Jump-Starting the Euro Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery? (2016)
Working Paper: Jump-Starting the Euro Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery? (2015)
Working Paper: Jump-Starting the Euro Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery?* (2015)
Working Paper: Jump Starting the Euro Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery? (2015)
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