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Jump-Starting the Euro Area Recovery: Would a Rise in Core Fiscal Spending Help the Periphery?

Listed author(s):
  • Blanchard, Olivier J
  • Erceg, Christopher
  • Lindé, Jesper

We show that a fiscal expansion by the core economies of the euro area would have a large and positive impact on periphery GDP assuming that policy rates remain low for a prolonged period. Under our preferred model specification, an expansion of core government spending equal to one percent of euro area GDP would boost periphery GDP around 1 percent in a liquidity trap lasting three years, about half as large as the effect on core GDP. Accordingly, under a standard ad hoc loss function involving output and inflation gaps, increasing core spending would generate substantial welfare improvements, especially in the periphery. The benefits are considerably smaller under a utility-based welfare measure, reflecting in part that higher net exports play a material role in raising periphery GDP.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 10716.

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Date of creation: Jul 2015
Handle: RePEc:cpr:ceprdp:10716
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