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Sovereign risk, monetary policy and fiscal multipliers: a structural model-based assessment

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  • Alberto Locarno

    ()
    (Banca d’Italia)

  • Alessandro Notarpietro

    ()

  • Massimiliano Pisani

    ()
    (Bank of Italy)

Abstract

This paper briefly reviews the literature on fiscal multipliers and then presents results for the Italian economy obtained by simulating a dynamic general equilibrium model that allows for the possibility (a) that the zero lower bound may be binding and (b) that the initial public debt-to-GDP ratio may affect the financing conditions of the public and private sectors (sovereign risk channel). The results are the following. First, the public consumption multiplier is in general less than 1. Second, it goes above 1 only under extremely strong assumptions, namely the constancy of the monetary policy rate for an exceptionally long period (at least five years) and there is full time-coincidence between the fiscal and the monetary stimuli. Third, when the sovereign risk channel is active the government spending multiplier is much lower. Finally, in all cases tax multipliers are lower than government consumption multipliers.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 943.

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Date of creation: Nov 2013
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Handle: RePEc:bdi:wptemi:td_943_13

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Keywords: Fiscal multiplier; monetary policy; zero lower bound; sovereign risk.;

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