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Fiscal policy in an estimated open-economy model for the Euro area

Author

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  • Marco Ratto
  • Werner Roeger
  • Jan in't Veld

Abstract

This paper uses an estimated DSGE model for the euro area to study the effects of fiscal stabilisation policies. There are at least two features of the euro area economy which makes this analysis interesting. First, there are nominal rigidities in goods and labour markets, and there are financial market frictions with a significant share of liquidity constrained households. Second, the government is a major sector of the euro area economy. In this paper we look at fiscal stabilisation via government consumption, investment, transfers and wage taxes. Empirical evidence is found for systematic countercyclical fiscal policy. Consistent with previous findings, there is a small positive fiscal multiplier in the case of transitory fiscal shocks. It is found that fiscal policy is effective in stabilising GDP in the presence of demand and supply shocks. Fiscal policy helps to reduce the demand externality arising from nominal rigidities. In addition automatic stabilisation via government transfers helps to smooth consumption of liquidity constrained household. Fiscal policy partly compensates the financial market distortion. With distorted goods, labour and financial markets it is found that the estimated fiscal policy rules reduce fluctuations in euro area GDP by about 14 percent.

Suggested Citation

  • Marco Ratto & Werner Roeger & Jan in't Veld, 2007. "Fiscal policy in an estimated open-economy model for the Euro area," European Economy - Economic Papers 2008 - 2015 266, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecopap:0266
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    References listed on IDEAS

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    Cited by:

    1. Dybczak, Kamil & Melecky, Martin, 2014. "EU fiscal stance vulnerability: Are the old members the gold members?," Economic Modelling, Elsevier, vol. 38(C), pages 87-101.
    2. Fritz Breuss & Katrin Rabitsch, 2009. "An estimated two-country DSGE model of Austria and the Euro Area," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 36(1), pages 123-158, February.
    3. Verstegen, Loes & Meijdam, Lex, 2016. "The Effectiveness of a Fiscal Transfer Mechanism in a Monetary Union : A DSGE Model for the Euro Area," Discussion Paper 2016-023, Tilburg University, Center for Economic Research.
    4. Leeper, Eric M. & Plante, Michael & Traum, Nora, 2010. "Dynamics of fiscal financing in the United States," Journal of Econometrics, Elsevier, vol. 156(2), pages 304-321, June.
    5. Matthew Canzoneri, 2007. "Coordination of Monetary and Fiscal Policy in a Monetary Union: Policy Issues & Analytical Models," Money Macro and Finance (MMF) Research Group Conference 2006 165, Money Macro and Finance Research Group.
    6. Ambriško, Róbert & Babecký, Jan & Ryšánek, Jakub & Valenta, Vilém, 2015. "Assessing the impact of fiscal measures on the Czech economy," Economic Modelling, Elsevier, vol. 44(C), pages 350-357.
    7. Dybczak, Kamil & Melecky, Martin, 2011. "Macroeconomic Shocks and the Fiscal Stance within the EU: A Panel Regression Analysis," MPRA Paper 33684, University Library of Munich, Germany.
    8. Matthew B. Canzoneri, 2007. "Coordination Of Monetary And Fiscal Policy In A Monetary Union: Policy Issues And Analytical Models," Manchester School, University of Manchester, vol. 75(s1), pages 21-43, September.
    9. Jamie Murray, 2013. "Parameter Uncertainty and the Fiscal Multiplier," Treasury Working Paper Series 13/19, New Zealand Treasury.
    10. Casimir Dadak, 2011. "Political Economy of the Euro Area Crisis," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 58(5), pages 593-604, December.
    11. Alfonso Arpaia & Werner Roeger & Janos Varga & Jan in 't Veld & Alexandr Hobza & Isabel Grilo & Peter Wobst, 2007. "Quantitative assessment of Structural Reforms: Modelling the Lisbon Strategy," European Economy - Economic Papers 2008 - 2015 282, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.

    More about this item

    Keywords

    DSGE modelling; fiscal policy; stabilisation policies; euro area; Ratto; Roeger; in't Veld;

    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
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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