Macroeconomic Adjustment in the Euro-area: The Role of Fiscal Policy

Vito Muscatelli, Tiziano Ropele and Patrizio Tirelli

Working Papers from Business School - Economics, University of Glasgow

Abstract: We Assess the extent to which fiscal policy, as automatic stabilisers, can stabilise national economies within EMU. We use a two-country New Keynesian DGE model with liquidity constrained consumers, sticky prices, and a home bias in the composition of national consumption bundles. The model allows a variety of channels for fiscal policy, and is estimated using Euro area data. We analyse the interaction of monetary and fiscal policies in EMU and demonstrate that, perhaps surprisingly, macroeconomic adjustment is not always facilitated by fiscal stabilisers in the case of certain types of shocks. The stabilising effects of fiscal policy at the national level are strictly dependent on the existence of home bias in consumption.

JEL-codes: E58 E62 E63 (search for similar items in EconPapers)
Date: 2004-10, Revised 2005-05
New Economics Papers: this item is included in nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2005_20

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