Adjustment Dynamics in the Euro Area - A Fresh Look at the Role of Fiscal Policy Using a DSGE Approach
AbstractSome researchers have recently introduced productive government investment spending into Dynamic stochastic general equilibrium (DSGE) models, adding a supply channel. This paper takes a similar perspective but it also introduces the government consumption good into the household utility function and this consumption good is supplied by a government production function. While higher government investment can increase private output and household consumption in the future, in the short run household utility is likely to decline because current consumption of private and government goods is shifted into investment and the supply of privately produced consumption goods is reduced. These considerations are especially relevant for euro-area members because fiscal policy is their only national macroeconomic policy tool.
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Bibliographic InfoPaper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 322.
Length: 41 pages
Date of creation: May 2008
Date of revision:
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Public investment; Public consumption; Government production function; DSGE models; Euro area; Adjustment Dynamics in the Euro Area ; A Fresh Look at the Role of Fiscal Policy Using a DSGE Approach; Kincaid;
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
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