Comparing different features of a fiscal stimulus in the euro area

Caroline Bozou () and Jerome Creel
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Caroline Bozou: UP1 - Université Paris 1 Panthéon-Sorbonne

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Abstract: We build a two-country DSGE model where we distinguish the core from the periphery of a monetary union. First, we highlight the spillovers of fiscal shocks across countries. Then, we evaluate and compare the macroeconomic effects of the European recovery plan NGEU with national plans. In all settings, we distinguish public consumption shocks from public investment ones, and funding via loans or grants. We also generate a post-Covid situation where we add a zero-lower bound and demand shocks and compare the outcomes to the former scenarios. We find that the stimulus is more effective when it is financed by grants, interestingly enough especially for public consumption, that public investment spending has a higher multiplier effect in the long run and that a European fiscal stimulus has always more impact per country than a national stimulus plan. A side-result permits to assess the opportunity cost of accepting loans.

Keywords: fiscal policy; open economy; euro area; spillovers; DSGE; NGEU; RRF (search for similar items in EconPapers)
Date: 2023-02-08
New Economics Papers: this item is included in nep-dge, nep-eec and nep-opm
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Working Paper: Comparing different features of a fiscal stimulus in the euro area (2023)
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