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Title:To react or not?: fiscal policy, volatility and welfare in the EU-3 PDF Logo
Authors:Malley, Jim
Philippopoulos, Apostolis
Woitek, Ulrich
Issue Date:2007
Series/Report no.:CESifo working paper 1919
Abstract:This paper develops a dynamic stochastic general equilibrium model to examine the quantitative macroeconomic implications of countercyclical fiscal policy for France, Germany and the UK. The model incorporates real wage rigidity which is the particular market failure justifying policy intervention. We subject the model to productivity shocks and use either government consumption or investment to react to the output gap or the public debt-to-output ratio. If the object of fiscal policy is purely to stabilize output or debt volatility, then our results suggest substantial reductions can be obtained, especially with respect to output. In stark contrast, however, a formal general equilibrium welfare assessment of the volatility implications of these alternative instrument/target combinations reveals the welfare gains from active policy, measured as a share of consumption, to be very modest.
JEL:E6
H5
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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