IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Fiscal Stimulus in a Small Euro Area Economy

Listed author(s):
  • Vanda Almeida
  • Gabriela Lopes de Castro
  • Ricardo Mourinho Félix
  • José R. Maria

The international economic and financial crisis elicited an intensive debate on fiscal stimulus programmes. Although the topics have been diverse, most of the research is focused on large countries, some of them in autarky. The literature covering small economies is thinner and for those integrated in a monetary union is virtually nonexistent. This paper is a contribution to fill this gap. The discussion draws on a New-Keynesian general equilibrium model introduced in Almeida, Castro and Félix (2008), which features a small euro area economy. Contrary to most of the literature that considers infinitely lived households, the model features stochastic finite lifetime households following Blanchard (1985), which are a source of non-Ricardian behaviour and allow for pinning-down the steady state net foreign asset position endogenously. Since in a small euro area economy monetary policy is not an available business cycle stabilisation tool, the use of fiscal policy to pursue this goal seems the only alternative. The results reveal that permanent government expenditure increases should be avoided, as opposed to temporary stimulus. This outcome is identical to the one obtained in the literature for large economies. Lags in the program implementation and limited credibility can however undermine the objectives of a temporary stimulus. In particular, in financial distress circumstances, under which the stimulus may trigger a hike in the country's risk premium, the effectiveness of the stimulus might be negligible.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://www.bportugal.pt/sites/default/files/anexos/papers/wp201016.pdf
Download Restriction: no

Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w201016.

as
in new window

Length:
Date of creation: 2010
Handle: RePEc:ptu:wpaper:w201016
Contact details of provider: Postal:
R. do Ouro, 27, 1100 LISBOA

Phone: 21 321 32 00
Fax: 21 346 48 43
Web page: https://www.bportugal.pt
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
  2. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  3. Gabriela Lopes de Castro, 2006. "Consumption, Disposable Income and Liquidity Constraints," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  4. Kim, Jinill, 2000. "Constructing and estimating a realistic optimizing model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 329-359, April.
  5. von Hagen, Jürgen & Schuknecht, Ludger & Wolswijk, Guido, 2011. "Government bond risk premiums in the EU revisited: The impact of the financial crisis," European Journal of Political Economy, Elsevier, vol. 27(1), pages 36-43, March.
  6. Cogan, John F. & Cwik, Tobias & Taylor, John B. & Wieland, Volker, 2010. "New Keynesian versus old Keynesian government spending multipliers," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 281-295, March.
  7. Bayoumi, Tamim & Sgherri, Silvia, 2006. "Mr Ricardo's Great Adventure: Estimating Fiscal Multipliers in a Truly Intertemporal Model," CEPR Discussion Papers 5839, C.E.P.R. Discussion Papers.
  8. Francesco Giavazzi & Marco Pagano, 1991. "The Advantage of Tying One's Hands: EMS Discipline and Central Bank Credibility," NBER Chapters,in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 303-330 National Bureau of Economic Research, Inc.
  9. Adolfson, Malin & Laseen, Stefan & Linde, Jesper & Villani, Mattias, 2007. "Bayesian estimation of an open economy DSGE model with incomplete pass-through," Journal of International Economics, Elsevier, vol. 72(2), pages 481-511, July.
  10. Ardagna Silvia & Caselli Francesco & Lane Timothy, 2007. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-35, August.
  11. Ganelli, Giovanni, 2005. "The new open economy macroeconomics of government debt," Journal of International Economics, Elsevier, vol. 65(1), pages 167-184, January.
  12. Fabio Canova & Evi Pappa, 2007. "Price Differentials in Monetary Unions: The Role of Fiscal Shocks," Economic Journal, Royal Economic Society, vol. 117(520), pages 713-737, 04.
  13. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78-121.
  14. Vanda Almeida & Gabriela Castro & Ricardo Félix, 2010. "Improving competition in the non-tradable goods and labour markets: the Portuguese case," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 9(3), pages 163-193, December.
  15. Jacob Frenkel & Assaf Razin, 1996. "Fiscal Policies and Growth in the World Economy," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262561042, July.
  16. Calvo, Guillermo A & Obstfeld, Maurice, 1988. "Optimal Time-Consistent Fiscal Policy with Finite Lifetimes," Econometrica, Econometric Society, vol. 56(2), pages 411-432, March.
  17. Proietti, Tommaso & Musso, Alberto, 2007. "Growth accounting for the euro area: a structural approach," Working Paper Series 0804, European Central Bank.
  18. Coenen, Günter & McAdam, Peter & Straub, Roland, 2008. "Tax reform and labour-market performance in the euro area: A simulation-based analysis using the New Area-Wide Model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2543-2583, August.
  19. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
  20. Ireland, Peter N., 2001. "Sticky-price models of the business cycle: Specification and stability," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 3-18, February.
  21. Douglas Laxton & Dirk V Muir & Michael Kumhof & Susanna Mursula & Charles Freedman, 2009. "Fiscal Stimulus to the Rescue? Short-Run Benefits and Potential Long-Run Costs of Fiscal Deficits," IMF Working Papers 09/255, International Monetary Fund.
  22. Marvin Goodfriend & Robert G. King, 2001. "The Case for Price Stability," NBER Working Papers 8423, National Bureau of Economic Research, Inc.
  23. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
  24. Laxton, Douglas & Pesenti, Paolo, 2003. "Monetary rules for small, open, emerging economies," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1109-1146, July.
  25. Kilponen, Juha & Ripatti, Antti, 2006. "Labour and product market competition in a small open economy – Simulation results using a DGE model of the Finnish economy," Research Discussion Papers 5/2006, Bank of Finland.
  26. Gauti B. Eggertsson, 2011. "What Fiscal Policy is Effective at Zero Interest Rates?," NBER Chapters,in: NBER Macroeconomics Annual 2010, Volume 25, pages 59-112 National Bureau of Economic Research, Inc.
  27. 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.
  28. Musso, Alberto & Proietti, Tommaso, 2007. "Growth accounting for the euro area: a structural approach," Working Paper Series 804, European Central Bank.
  29. Günter Coenen & Christopher J. Erceg & Charles Freedman & Davide Furceri & Michael Kumhof & René Lalonde & Douglas Laxton & Jesper Lindé & Annabelle Mourougane & Dirk Muir & Susanna Mursula & Carlos d, 2012. "Effects of Fiscal Stimulus in Structural Models," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 22-68, January.
  30. Buiter, Willem H, 1988. "Death, Birth, Productivity Growth and Debt Neutrality," Economic Journal, Royal Economic Society, vol. 98(391), pages 279-293, June.
  31. Antonio Spilimbergo & Martin Schindler & Steven A. Symansky, 2009. "Fiscal Multipliers," IMF Staff Position Notes 2009/11, International Monetary Fund.
  32. Smets, Frank & Wouters, Raf, 2007. "Shocks and frictions in US business cycles: a Bayesian DSGE approach," Working Paper Series 722, European Central Bank.
  33. Julio J. Rotemberg, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Oxford University Press, vol. 49(4), pages 517-531.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ptu:wpaper:w201016. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (DEE-NTDD)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.