Fiscal Policy, Monetary Regimes and Current Account Dynamics (original) (raw)

The general equilibrium effects of fiscal policy: Estimates for the Euro area

Journal of Public Economics, 2009

This paper describes a dynamic stochastic general equilibrium model featuring a fraction of non-Ricardian agents in order to estimate the effects of fiscal policy in the Euro area. The model takes into account distortionary taxation on labor and capital income and on consumption, while expenditures are broken down into purchases of goods and services, compensation of public employees and transfers to households. A newly computed quarterly data set of fiscal variables is used. Our results point to the prevalence of mild Keynesian effects of public expenditures. In particular, although innovations in fiscal policy variables tend to be rather persistent, government purchases of goods and services and compensations for public employees have small and short-lived expansionary effects on private consumption, while innovations in transfers to households show a slightly more sizeable and lasting effect. The effects are more significant on the revenue side: decreases in labor income and consumption tax rates have sizeable effects on consumption and output, while a reduction in capital income tax favors investment and output in the medium run. Finally our estimates suggest that fiscal policy variables contribute little to the cyclical variability of the main macro variables.

Monetary and Fiscal Stabilization of Demand Shocks Within Europe

Review of International Economics, 1997

This paper examines alternative macroeconomic stabilization rules for demand shocks, for a single open economy, and for an integrated European region. These questions are tackled in two ways. First a very simple macroeconomic model is used to focus on intercountry interconnections. Then the effects of shocks are simulated using the McKibbin Sachs MSG2 global economic model. The theoretical model analyzes just how much larger the disturbances caused by asymmetric shocks might be in a European Monetary Union, as compared with outcomes under floating exchange rates, especially (1) if rigid central monitoring and discipline of fiscal policy prevents the full operation of the inbuilt fiscal stabilizers within individual European countries, and (2) if European monetary policy does not concern itself with fully European objectives. Simulations with the MSG2 model bear out the significance of these risks. They show that a demand shock like GEMU can have strongly negative effects on output in other European countries if either interest rates are raised to counter the demand shock in the originating country, or if, for some reason, fiscal stabilization is not allowed to be as strong as the inbuilt fiscal stabilizers.

Fiscal policy in open economies: estimates for the Euro area

2000

This paper reconsiders the economic efiects of flscal policy using an estimated small open economy dynamic stochastic general equilibrium model for the Euro area. We try to estimate the size of flscal multipliers obtained in an open economy model and the efiects of flscal shocks on the Euro area trade balance and real exchange rate. We show that estimated GDP

Is fiscal integration our last resort? The risk sharing in the European Monetary Union

"Science and Education" Scientific Journal, 2021

The turbulent economic conditions that the European Monetary Union is facing, has created the need for an urgent change of the current fiscal policy of member states in the European Area. This research focuses on the use a Dynamic Stochastic General Equilibrium Model (DSGE) that tries to analyse the policy effectiveness of two main innovations in fiscal integration. The first one is the introduction of the Eurobond and the second one is the creation of a European Unemployment Insurance. The first one is the introduction of the Eurobond and the second one is the creation of European Unemployment Insurance which will try to evaluate the welfare and business cycle effects of fiscal integration of the European Union. A New-Keynesian theory model could be estimated from the Euro Area due to the heterogeneity of the different countries.

One Emu Fiscal Policy for the Euro

Macroeconomic Dynamics, 2019

We build a two-country New-Keynesian DSGE model of a Currency Union to study the effects of fiscal policy coordination, by evaluating the stabilization properties and welfare implications of different fiscal policy scenarios. Our main findings are that a government spending rule which targets the net exports gap rather than the domestic output gap produces more stable dynamics and that consolidating government budget constraints across countries with symmetric tax rate movements provides greater stabilization. A key role is played by the trade elasticity which determines the impact of the terms of trade on net exports. In fact, when goods are complements, the stabilization properties of coordinating fiscal policies are no longer supported. These findings point out to possible policy prescriptions for the Euro Area: to coordinate fiscal policies by reducing international demand imbalances, either by stabilizing trade flows across countries or by creating some form of Fiscal Union or ...

Monetary–fiscal crosswinds in the European Monetary Union

European Economic Review

We study the monetary-fiscal mix in the European Monetary Union. The medium and long-run effects of conventional and unconventional monetary policy are analysed by combining monetary policy shocks identified in a Structural VAR, and the general government budget constraint featuring a single central bank and multiple fiscal authorities. In response to a conventional easing of the policy rate, the cumulated response of the fiscal deficit is positive. Conversely, in response to an unconventional easing affecting the long end of the yield curve, the primary fiscal position barely moves. This is consistent with the long-run effect of unconventional monetary easing on the price index, which is about half that of conventional easing. The aggregate long-run cumulated surplus is mainly driven by Germany's fiscal policy during the period in which unconventional monetary policy was adopted.

Fiscal Policy and Macroeconomic Stability in a Monetary Union

We analyze the efiects of flscal policy in a currency area. We de- velop a two-region model having sticky prices, a common monetary authority and regional flscal policies. We break the ricardian equiva- lence and allow for keynesian efiects of public expenditure introducing rule-of-thumb agents in each region. Main results are the following. First, consistently with the empirical evidence, after a public spend- ing shock in one region private agents demand for imports increases and the terms of trade appreciates. Second, a countercyclical flscal rule can restore the Taylor principle and the uniqueness of the equi- librium. Finally, a countercyclical flscal rule contributes to reduce macroeconomic volatility.

Monetary-Fiscal Policy Relations in the Euro Area: The Impact on the Primary Balance

Social Science Research Network, 2022

With this paper, our objective is to empirically study public debt sustainability by estimating a fiscal reaction function where the primary balance relative to GDP is assumed to be a function of the public debt to GDP ratio of the previous year and of other macroeconomic variables. In particular, we take into account the effects of monetary policy on the primary budget of the government by including the real long term interest rate and the inflation rate, measured as the change in the GDP price deflator. We resort to the fixed effects and to the random effects models for a panel of 12 euro area economies from 1996 to 2020. We find statistical evidence for sustainable debt policies and detect that both monetary policy variables are positively correlated with the primary balance to GDP ratio. This holds both for the fixed and for the random effects estimation, when those variables are included simultaneously.

Macroeconomic Adjustment in the Euro-area: The Role of Fiscal Policy

We Assess the extent to which fiscal policy, as automatic stabilisers, can stabilise national economies within EMU. We use a two-country New Keynesian DGE model with liquidity constrained consumers, sticky prices, and a home bias in the composition of national consumption bundles. The model allows a variety of channels for fiscal policy, and is estimated using Euro area data. We analyse the interaction of monetary and fiscal policies in EMU and demonstrate that, perhaps surprisingly, macroeconomic adjustment is not always facilitated by fiscal stabilisers in the case of certain types of shocks. The stabilising effects of fiscal policy at the national level are strictly dependent on the existence of home bias in consumption.

Monetary Union: Fiscal Stabilisation In The Face Of Asymmetric Shocks

2004

This paper investigates the importance of fiscal policy in providing macroeco- nomic stabilisation in a monetary union. We use a microfounded New Keynesian model of a monetary union which incorporates persistence in inflation, and exam- ine non-cooperative interactions of fiscal and monetary authorities. We find that particularly when inflation is persistent, the use of fiscal policy for stabilisation can significantly improve welfare over and above that which arises through the working of automatic stabilisers. We conclude that a regulatory framework for fiscal policy in a monetary union should allow a role for active fiscal stabilisation.