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Fiscal Policy, Pricing Frictions and Monetary Accommodation

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  • Fabio Canova
  • Evi Pappa

Abstract

We investigate the theoretical conditions for effectiveness of government consumption expenditure expansions using US, Euro area and UK data. Fiscal expansions taking place when monetary policy is accommodative lead to large output multipliers in normal times. The 2009-2010 packages need not produce significant output multipliers, may have moderate debt effects, and only generate temporary inflation. Expenditure expansions accompanied by deficit/debt consolidations schemes may lead to short run output gains but their success depends on how monetary policy and expectations behave. Trade openness and the cyclicality of the labor wedge explain cross-country differences in the magnitude of the multipliers.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 549.

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Date of creation: Mar 2011
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Handle: RePEc:bge:wpaper:549

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Keywords: Government consumption expenditure shocks; pricing frictions; monetary policy accommodation; debt and inflation dynamics;

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  1. Coenen, Günter & Mohr, Matthias & Straub, Roland, 2008. "Fiscal consolidation in the euro area: Long-run benefits and short-run costs," Economic Modelling, Elsevier, Elsevier, vol. 25(5), pages 912-932, September.
  2. Forni, Lorenzo & Gerali, Andrea & Pisani, Massimiliano, 2010. "The macroeconomics of fiscal consolidations in euro area countries," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 34(9), pages 1791-1812, September.
  3. Christopher J. Nekarda & Valerie A. Ramey, 2011. "Industry Evidence on the Effects of Government Spending," American Economic Journal: Macroeconomics, American Economic Association, American Economic Association, vol. 3(1), pages 36-59, January.
  4. Mertens, Karel & Ravn, Morten O., 2009. "Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy Shocks," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7505, C.E.P.R. Discussion Papers.
  5. Mario Forni & Luca Gambetti, 2010. "Fiscal Foresight and the Effects of Government Spending," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 851.10, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  6. Kirchner, Markus & Cimadomo, Jacopo & Hauptmeier, Sebastian, 2010. "Transmission of government spending shocks in the euro area: Time variation and driving forces," Working Paper Series, European Central Bank 1219, European Central Bank.
  7. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2009. "When is the government spending multiplier large?," NBER Working Papers 15394, National Bureau of Economic Research, Inc.
  8. Michael Kumhof & Dirk Muir & Carlos de Resende & Jan in ‘t Veld & René Lalonde & Davide Furceri & Annabelle Mourougane & John Roberts & Stephen Snudden & Mathias Trabandt & Günter Coenen &, 2010. "Effects of Fiscal Stimulus in Structural Models," IMF Working Papers, International Monetary Fund 10/73, International Monetary Fund.
  9. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2011. "Foresight and Information Flows," NBER Working Papers 16951, National Bureau of Economic Research, Inc.
  10. Afonso, António, 2006. "Expansionary fiscal consolidations in Europe: new evidence," Working Paper Series, European Central Bank 0675, European Central Bank.
  11. Eric M. Leeper & Todd B. Walker & Shu‐Chun Susan Yang, 2013. "Fiscal Foresight and Information Flows," Econometrica, Econometric Society, Econometric Society, vol. 81(3), pages 1115-1145, 05.
  12. Robert E. Hall, 2011. "The Long Slump," American Economic Review, American Economic Association, American Economic Association, vol. 101(2), pages 431-69, April.
  13. Caldara, Dario & Kamps, Christophe, 2008. "What are the effects of fiscal policy shocks? A VAR-based comparative analysis," Working Paper Series, European Central Bank 0877, European Central Bank.
  14. Robert J. Barro & Charles J. Redlick, 2009. "Macroeconomic Effects from Government Purchases and Taxes," NBER Working Papers 15369, National Bureau of Economic Research, Inc.
  15. Paredes, Joan & Pedregal, Diego J. & Pérez, Javier J., 2009. "A quarterly fiscal database for the euro area based on intra-annual fiscal information," Working Paper Series, European Central Bank 1132, European Central Bank.
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Citations

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Cited by:
  1. Giovanni Melina & Stefania Villa, 2013. "Fiscal Policy and Lending Relationships," IMF Working Papers, International Monetary Fund 13/141, International Monetary Fund.
  2. Virkola, Tuomo, 2014. "Exchange Rate Regime, Fiscal Foresight and the Effectiveness of Fiscal Policy in a Small Open Economy," ETLA Reports, The Research Institute of the Finnish Economy 20, The Research Institute of the Finnish Economy.
  3. Cimadomo, Jacopo & Hauptmeier, Sebastian & Sola, Sergio, 2011. "Identifying the effects of government spending shocks with and without expected reversal: an approach based on U.S. real-time data," Working Paper Series, European Central Bank 1361, European Central Bank.
  4. Pascal Michaillat, 2012. "Fiscal Multipliers over the Business Cycle," CEP Discussion Papers, Centre for Economic Performance, LSE dp1115, Centre for Economic Performance, LSE.
  5. Cristiano Cantore & Paul Levine & Giovanni Melina, 2011. "A Fiscal Stimulus and Jobless Recovery," School of Economics Discussion Papers, School of Economics, University of Surrey 1111, School of Economics, University of Surrey.
  6. Pascal Michaillat, 2014. "A Theory of Countercyclical Government Multiplier," American Economic Journal: Macroeconomics, American Economic Association, American Economic Association, vol. 6(1), pages 190-217, January.
  7. Vivek Prasad, 2014. "Balanced budget stimulus with tax cuts in a liquidity constrained economy," Birkbeck Working Papers in Economics and Finance, Birkbeck, Department of Economics, Mathematics & Statistics 1401, Birkbeck, Department of Economics, Mathematics & Statistics.

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