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Domestic Fiscal Policy in a Monetary Union: What are the Spillovers?

  • Heinz Welsch


    (Universität Oldenburg)

This paper examines the spillovers of domestic fiscal expansion in a monetary union. Such a policy action leads to cross-country crowding-out effects on the one hand and cross-country multiplier effects on the other. The overall effect is indeterminate a priori. The approach pursued is therefore an empirical one, using a computable general equilibrium (CGE) model with a simple representation of the money market. Three groups of parameters are identified as key determinants of the fiscal policy spillover: the elasticities of substitution in foreign trade (being a measure of the degree of trade integration), the interest elasticity of money demand, and the elasticity of wages with respect to the employment situation. For a reasonable range of parameter configurations, the interest rate effect always dominates the multiplier effect. Especially, even with a degree of trade integration four times as high as commonly assumed the overall spillover is (slightly) negative.

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Article provided by Justus-Liebig University Giessen, Department of Statistics and Economics in its journal Journal of Economics and Statistics.

Volume (Year): 220 (2000)
Issue (Month): 3 ()
Pages: 327-342

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Handle: RePEc:jns:jbstat:v:220:y:2000:i:3:p:327-342
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