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QÖC: Jesper Linde (Sveriges Riksbank)

26.05.2016 | 17:00 c.t.

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


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 speci…cation, 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, nearly half as large as the effect on core GDP. Accordingly, under a standard ad hoc loss function involving output and in‡flation gaps, increasing core spending would generate substantial welfare improvements, especially in the periphery. The benefi…ts are considerably smaller under a utility-based welfare measure, refl‡ecting in part that higher net exports play a material role in raising periphery GDP.

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