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To react or not? Technology shocks, fiscal policy and welfare in the EU-3

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  • Malley, Jim
  • Philippopoulos, Apostolis
  • Woitek, Ulrich

Abstract

This paper develops a dynamic stochastic general equilibrium (DSGE) model to examine the quantitative macroeconomic implications of counter-cyclical fiscal policy for France, Germany and the UK. The model incorporates real wage rigidity and consumption habits, as the particular market failures justifying policy intervention. We subject the model to productivity shocks and allow policy instruments to react to the output gap and the debt-to-output ratio. A welfare analysis reveals that the most effective instrument-target combination is to use public consumption to stabilize the output gap. Moreover, welfare gains from counter-cyclical fiscal policy are much stronger in the presence of wage rigidities compared with consumption habits. Finally, since active policy and automatic stabilizers are substitutes, it is possible that relatively undistorted economies may be in need of countercyclical fiscal action due to inadequate automatic stabilizers.

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  • Malley, Jim & Philippopoulos, Apostolis & Woitek, Ulrich, 2009. "To react or not? Technology shocks, fiscal policy and welfare in the EU-3," European Economic Review, Elsevier, vol. 53(6), pages 689-714, August.
  • Handle: RePEc:eee:eecrev:v:53:y:2009:i:6:p:689-714
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    Citations

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    Cited by:

    1. George Economides & Apostolis Philippopoulos & Petros Varthalitis, 2016. "Monetary Union, Even Higher Integration, or Back to National Currencies?," CESifo Economic Studies, CESifo, vol. 62(2), pages 232-255.
    2. Philippopoulos, Apostolis & Varthalitis, Petros & Vassilatos, Vanghelis, 2015. "Optimal fiscal and monetary policy action in a closed economy," Economic Modelling, Elsevier, vol. 48(C), pages 175-188.
    3. Konstantinos Angelopoulos & Jim Malley & Apostolis Philippopoulos, 2008. "Welfare implications of public education spending rules," Working Papers 2008_37, Business School - Economics, University of Glasgow.
    4. repec:eee:dyncon:v:83:y:2017:i:c:p:55-106 is not listed on IDEAS
    5. Angelopoulos, Konstantinos & Malley, Jim & Philippopoulos, Apostolis, 2011. "The welfare implications of resource allocation policies under uncertainty: The case of public education spending," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 176-192, June.
    6. Philippopoulos, Apostolis & Varthalitis, Petros & Vassilatos, Vanghelis, 2017. "Fiscal consolidation and its cross-country effects," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 55-106.
    7. Wei Jiang, 2014. "Optimal taxation and labour wedge in models with equilibrium unemployment," Studies in Economics 1407, School of Economics, University of Kent.
    8. Alessandro Maravalle & Peter Claeys, 2010. "Fiscal policy and economic stability: does PIGS stand for Procyclicality In Government Spending?," IREA Working Papers 201015, University of Barcelona, Research Institute of Applied Economics, revised 2010.
    9. Apostolis Philippopoulos & Petros Varthalitis & Vanghelis Vassilatos, 2013. "Optimal Fiscal Action in an Economy with Sovereign Premia and without Monetary Independence: An Application to Italy," CESifo Working Paper Series 4199, CESifo Group Munich.
    10. Konstantinos Angelopoulos & George Economides & Apostolis Philippopoulos, "undated". "What is the best environmental policy? Taxes, permits and rules under economic and environmental uncertainty," DEOS Working Papers 1014, Athens University of Economics and Business.
    11. Dimitris Papageorgiou, 2014. "BoGGEM: a dynamic stochastic general equilibrium model for policy simulations," Working Papers 182, Bank of Greece.
    12. repec:taf:oabmxx:v:3:y:2016:i:1:p:1154283 is not listed on IDEAS
    13. Maravalle, Alessandro & Claeys, Peter, 2012. "Boom–bust cycles and procyclical fiscal policy in a small open economy," Journal of Policy Modeling, Elsevier, vol. 34(5), pages 735-754.
    14. Konstantinos Angelopoulos & Bernardo X. Fernandez & James Malley, 2010. "The distributional consequences of supply-side reforms in general equilibrium," Working Papers 2010_26, Business School - Economics, University of Glasgow, revised Jun 2012.
    15. Apostolis Philippopoulos & Petros Varthalitis & Vanghelis Vassilatos, 2012. "On the optimal mix of fiscal and monetary policy actions," Working Papers 150, Bank of Greece.
    16. Dimitris Papageorgiou, 2011. "Fiscal policy, economic activity and welfare: the case of Greece," Economics Bulletin, AccessEcon, vol. 31(3), pages 2629-2640.

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