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

Olivier Blanchard, Jesper Lindé and Christopher Erceg

No 10716, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 one percent of euro area GDP would boost periphery GDP around 1 percent in a liquidity trap lasting three years, about half as large as the effect on core 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.

Keywords: Monetary policy; Fiscal policy; Liquidity trap; Zero bound constraint; Dsge model; Currency union (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2015-07
New Economics Papers: this item is included in nep-eec, nep-mac, nep-opm and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (36)

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Related works:
Journal Article: Jump-Starting the Euro-Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery? (2017)
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)
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