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

NBER Working Paper No. 21426
Issued in July 2015, Revised in October 2016
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics

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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Document Object Identifier (DOI): 10.3386/w21426

Published: Olivier Blanchard & Christopher J. Erceg & Jesper Lindé, 2017. "Jump-Starting the Euro-Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery?," NBER Macroeconomics Annual, University of Chicago Press, vol. 31(1), pages 103-182. citation courtesy of

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