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

Olivier Blanchard (), Christopher Erceg and Jesper Lindé

No 304, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

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)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec, nep-mac, nep-opm and nep-upt
Date: 2015-07-01
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http://www.riksbank.se/Documents/Rapporter/Working ... rap_wp304_150714.pdf (application/pdf)

Related works:
Journal Article: Jump-Starting the Euro-Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery? (2017) Downloads
Chapter: Jump-Starting the Euro Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery? (2016) Downloads
Working Paper: Jump-Starting the Euro Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery? (2015) Downloads
Working Paper: Jump Starting the Euro Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery? (2015) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0304

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