Jump-Starting the Euro Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery?
Chapter in NBER book NBER Macroeconomics Annual 2016, Volume 31 (2017), Martin Eichenbaum and Jonathan A. Parker, editors (p. 103 - 182)
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 by over 1 percent in a liquidity trap lasting three years, nearly 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.This chapter is no longer available for free download, since the book has been published. To obtain a copy, you must buy the book.
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This paper was revised on September 30, 2016
Comment, Harald Uhlig
Comment, Ricardo Reis
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