Olivier Blanchard (), Christopher J. Erceg () and Jesper Lindé ()
Additional contact information
Olivier Blanchard: International Monetary Fund, Postal: 700 19th Street, N.W., Washington, D.C. 20431
Christopher J. Erceg: Federal Reserve Board, Postal: 20th Street and Constitution Avenue N.W., Washington, D.C. 20551
Jesper Lindé: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, 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
91 pages, July 1, 2015
Full text files
rap_wp304_150714.pdf
Questions (including download problems) about the papers in this series should be directed to Lena Löfgren ()
Report other problems with accessing this service to Sune Karlsson ().
This page generated on 2024-02-05 17:13:28.