NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Jump-Starting the Euro Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery?

Olivier Blanchard, Christopher J. Erceg, Jesper Lindé

Chapter in NBER book NBER Macroeconomics Annual 2016, Volume 31 (2017), Martin Eichenbaum and Jonathan A. Parker, editors (p. 103 - 182)
Conference held April 15-16, 2016
Published in May 2017 by University of Chicago Press
© 2017 by the National Bureau of Economic Research
in NBER Book Series NBER Macroeconomics Annual

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.

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This paper was revised on September 30, 2016

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Commentary on this chapter:
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