Fiscal stimulus and exit strategies in a small euro area economy

Gabriela Castro () and José Maria
Authors registered in the RePEc Author Service: Ricardo Mourinho Félix () and Vanda Almeida

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: This article is focused on fiscal stimulus and exit strategies in a small euro area economy. The analysis is based on a New Keynesian general equilibrium model with non-Ricardian features introduced in Almeida, Castro and Félix (2010). We define a benchmark fiscal stimulus and, conditional on alternative exit strategies, clarify itsmacroeconomic effects. We investigate if a fiscal stimulus can be enhanced (or harmed) by particular exit strategies. The impact multipliers proved insufficient to discriminate between alternative strategies. However, since the policy impacts are not limited tothe short run, there are relevant effects over the medium run that can be used to evaluate the different strategies. It will be claimed that (i) the announcement of a promptly and timely exit strategy, contemporaneous to the announcement of the fiscal stimulus, with a consolidation period that is not prolonged indefinitively, may improve the effectiveness of the stimulus and that (ii) exit strategies based on Government consumption cuts tend to dominate over other alternatives, such as transfers cuts ortax rate increases.

JEL-codes: E62 F41 H62 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w201023

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