Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/129722
Authors: 
Blanchard, Olivier
Erceg, Christopher J.
Lindé, Jesper
Year of Publication: 
2015
Series/Report no.: 
Sveriges Riksbank Working Paper Series 304
Abstract: 
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 around 1 percent in a liquidity trap lasting three years, about 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.
Subjects: 
Monetary Policy
Fiscal Policy
Liquidity Trap
Zero Bound Constraint
DSGE Model
Currency Union
JEL: 
E52
E58
Document Type: 
Working Paper

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