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Domestic Fiscal Policy in a Monetary Union: What are the Spillovers?

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  • Heinz Welsch

    ()
    (Universität Oldenburg)

Abstract

This paper examines the spillovers of domestic fiscal expansion in a monetary union. Such a policy action leads to cross-country crowding-out effects on the one hand and cross-country multiplier effects on the other. The overall effect is indeterminate a priori. The approach pursued is therefore an empirical one, using a computable general equilibrium (CGE) model with a simple representation of the money market. Three groups of parameters are identified as key determinants of the fiscal policy spillover: the elasticities of substitution in foreign trade (being a measure of the degree of trade integration), the interest elasticity of money demand, and the elasticity of wages with respect to the employment situation. For a reasonable range of parameter configurations, the interest rate effect always dominates the multiplier effect. Especially, even with a degree of trade integration four times as high as commonly assumed the overall spillover is (slightly) negative.

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Bibliographic Info

Article provided by Justus-Liebig University Giessen, Department of Statistics and Economics in its journal Journal of Economics and Statistics.

Volume (Year): 220 (2000)
Issue (Month): 3 ()
Pages: 327-342

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Handle: RePEc:jns:jbstat:v:220:y:2000:i:3:p:327-342

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Related research

Keywords: Monetary union; fiscal policy; international spillovers; computable general equilibrium;

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Cited by:
  1. Buchmüller, Patrik & Marte, Andreas, 2003. "Paradigmenwechsel der EU-Finanzpolitik? Der Stabilitätspakt auf dem Prüfstand," Tübinger Diskussionsbeiträge 267, University of Tübingen, School of Business and Economics.
  2. Uhlig, Harald, 2002. "One Money, but Many Fiscal Policies in Europe: What Are the Consequences?," CEPR Discussion Papers 3296, C.E.P.R. Discussion Papers.
  3. Luigi Bonatti & Annalisa Cristini, 2007. "Breaking the stability pact: was it predictable?," Department of Economics Working Papers 0714, Department of Economics, University of Trento, Italia.

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