Macroeconomic effects of fiscal consolidations in a DSGE model for the Euro Area: does composition matter?
AbstractWe develop a new-Keynesian DSGE model with an extended fiscal policy block to assess the conditions for expansionary fiscal consolidations. In addition to several taxes, we consider public employment expenditures and government spending, which may have different degrees of productivity. We calibrate the model for the Euro Area and use it to simulate alternative fiscal consolidations with changes in the budget composition. Among the main conclusions we find that: (i) if conducted with a cut in weaklyproductive spending and a symmetric increase in highly-productive spending, fiscal consolidations have expansionary effects on investment and output; (ii) if consolidation is pursued through a pure reduction in weaklyproductive public employment, the effects on output decrease with the degree of labor market competition and turn out to be positive under perfect competition.
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Bibliographic InfoPaper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 421.
Length: 44 pages
Date of creation: Jul 2011
Date of revision:
fiscal policy; fiscal consolidation; new-Keynesian DSGE model;
Find related papers by JEL classification:
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-08-02 (All new papers)
- NEP-CBA-2011-08-02 (Central Banking)
- NEP-DGE-2011-08-02 (Dynamic General Equilibrium)
- NEP-EEC-2011-08-02 (European Economics)
- NEP-MAC-2011-08-02 (Macroeconomics)
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