Macroeconomic and welfare effects of structural and budgetary policies: spillovers in the MSG3 model

In this chapter, we aim at analysing and evaluating the macroeconomic effects of structural policy measures and of policies of budgetary consolidation. For the former, we build upon the results obtained in Chapter 5 regarding the spillovers from economic reforms that close the efficiency gap between the Euro Area and the US. For the latter, we start from the fact that at present, several Euro Area (and other EU) countries have difficulties in fulfilling the deficit and debt criteria of the Stability and Growth Pact and try to consolidate their budgets. In Chapters 3 and 4, empirical estimates of the spillovers from budgetary policies that increase the surplus of the public budget were provided. Here we will use the MSG3 Model, the most recent version of the McKibbin-Sachs Global Model, to simulate policies which we consider to be feasible (see the Appendix to this chapter, for more information on this model). First, we consider structural and budgetary policies separately, and then we combine both of them. Both isolated (non-coordinated) policy actions of one country only and coordinated (joint) Euro Area policies will be investigated. We will concentrate on isolated policies by Germany and Italy only; effects for France are between these two, and spillovers for a small economy are negligible. In order to arrive at policy recommendations, we will also provide some tentative welfare calculations comparing different scenarios.