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Fiscal stimulus and exit strategies in the EU: a model-based analysis

  • Werner Roeger
  • Jan in 't Veld

Summary for non-specialistsThis paper uses a multi-region dynamic general equilibrium model with collateral constrained households and residential investment to examine the effectiveness of fiscal policy. The presence of credit constrained households makes fiscal policy a more powerful tool for short run stabilisation and reinforces the effects from monetary accommodation at the zero lower bound. There exists an asymmetry between fiscal multipliers of temporary stimulus and multipliers of permanent fiscal consolidation, with the latter being smaller. Fiscal consolidations are likely to have short term negative output effects, but GDP will be higher in the medium and long run. Designing consolidations in such a way as to maximise the long term growth benefits from tax reforms could help to minimise the short term costs.

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File URL: http://ec.europa.eu/economy_finance/publications/economic_paper/2010/pdf/ecp426_en.pdf
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Paper provided by Directorate General Economic and Financial Affairs (DG ECFIN), European Commission in its series European Economy - Economic Papers with number 426.

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Length: 39 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:euf:ecopap:0426
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  1. Marco Ratto & Werner Roeger & Jan in 't Veld, 2010. "Using a DSGE model to look at the recent boom-bust cycle in the US," European Economy - Economic Papers 397, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  2. Thomas Laubach, 2003. "New evidence on the interest rate effects of budget deficits and debt," Finance and Economics Discussion Series 2003-12, Board of Governors of the Federal Reserve System (U.S.).
  3. Ratto, Marco & Roeger, Werner & Veld, Jan in 't, 2009. "QUEST III: An estimated open-economy DSGE model of the euro area with fiscal and monetary policy," Economic Modelling, Elsevier, vol. 26(1), pages 222-233, January.
  4. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, vol. 100(2), pages 573-78, May.
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