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Macroeconomic Adjustment in the Euro-area: The Role of Fiscal Policy

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  • V. Anton Muscatelli
  • Tiziano Ropele
  • Patrizio Tirelli

Abstract

We Assess the extent to which fiscal policy, as automatic stabilisers, can stabilise national economies within EMU. We use a two-country New Keynesian DGE model with liquidity constrained consumers, sticky prices, and a home bias in the composition of national consumption bundles. The model allows a variety of channels for fiscal policy, and is estimated using Euro area data. We analyse the interaction of monetary and fiscal policies in EMU and demonstrate that, perhaps surprisingly, macroeconomic adjustment is not always facilitated by fiscal stabilisers in the case of certain types of shocks. The stabilising effects of fiscal policy at the national level are strictly dependent on the existence of home bias in consumption.

Suggested Citation

  • V. Anton Muscatelli & Tiziano Ropele & Patrizio Tirelli, 2004. "Macroeconomic Adjustment in the Euro-area: The Role of Fiscal Policy," Working Papers 2005_20, Business School - Economics, University of Glasgow, revised May 2005.
    • Handle: RePEc:gla:glaewp:2005_20
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    1. V. Anton Muscatelli & Patrizio Tirelli, 2005. "Analyzing the Interaction of Monetary and Fiscal Policy: Does Fiscal Policy Play a Valuable Role in Stabilisation?," CESifo Economic Studies, CESifo Group, vol. 51(4), pages 549-585.

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    More about this item

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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