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Fiscal policy, pricing frictions and monetary accommodation

Fabio Canova () and Evi Pappa ()

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We investigate the theoretical conditions for effectiveness of government consumption expenditure expansions using US, Euro area and UK data. Fiscal expansions taking place when monetary policy is accommodative lead to large output multipliers in normal times. The 2009-2010 packages need not produce significant output multipliers, may have moderate debt effects, and only generate temporary inflation. Expenditure expansions accompanied by deficit/debt consolidations schemes may lead to short run output gains but their success depends on how monetary policy and expectations behave. Trade openness and the cyclicality of the labor wedge explain cross-country differences in the magnitude of the multipliers.

Keywords: Government consumption expenditure shocks; pricing frictions; monetary policy accommodation; debt and inflation dynamics (search for similar items in EconPapers)
JEL-codes: C32 E62 E63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
Date: 2011-03
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Journal Article: Fiscal policy, pricing frictions and monetary accommodation (2011) Downloads
Working Paper: Fiscal Policy, Pricing Frictions and Monetary Accommodation
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