In search of the Euro area fiscal stance

Alice Albonico, Alessia Paccagnini and Patrizio Tirelli

No 201612, Working Papers from School of Economics, University College Dublin

Abstract: This paper investigates the role of fiscal policies over the aggregate EMU business cycle. Previous studies, based on the assumption of non-separability between public and private consumptions, obtain a large public consumption multiplier, a small fraction of non-Ricardian households and, consequently, a relatively small multiplier for public transfers. We provide motivations for assuming separability and, on these grounds, we estimate a relatively large share of non-Ricardian households. As a result, we obtain that both multipliers are large. We also find that, in spite of their potentially strong effects, fiscal policies were substantially muted during the EMU years. This result is confirmed even for the post 2007 period. In fact fiscal policies did not complement the monetary policy stimulus in response to the financial crisis. Further, we cannot detect any substantial aggregate effect of austerity measures. Finally, the post-2007 surge in expenditure-to-GDP ratios was apparently determined by non-policy shocks that reduced output growth.

Keywords: DSGE; Limited asset market participation; Bayesian estimation; Euro area; Business cycle; Monetary policy; Fiscal policy (search for similar items in EconPapers)
JEL-codes: C11 C13 C32 E21 E32 E37 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2016-08
New Economics Papers: this item is included in nep-eec, nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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http://hdl.handle.net/10197/7863 First version, 2016 (application/pdf)

Related works:
Journal Article: In search of the Euro area fiscal stance (2016)
Working Paper: In search of the Euro Area Fiscal Stance (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ucn:wpaper:201612

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