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Adjustment Dynamics in the Euro Area - A Fresh Look at the Role of Fiscal Policy Using a DSGE Approach

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  • G. Russell Kincaid
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    Abstract

    Some 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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    File URL: http://ec.europa.eu/economy_finance/publications/publication12596_en.pdf
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    Bibliographic Info

    Paper provided by Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 322.

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    Length: 41 pages
    Date of creation: May 2008
    Date of revision:
    Handle: RePEc:euf:ecopap:0322

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    Keywords: 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;

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