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Fiscal multipliers in a small euro area economy: How big can they get in crisis times?

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  • Gabriela Castro
  • José R. Maria
  • Paulo Júlio
  • Ricardo Mourinho Félix

Abstract

Using PESSOA, a small open economy DSGE model, we analyze the size of short-runfiscal multipliers associated with fiscal consolidation under two distinct alternative scenarios, viz "normal times" and "crisis times." The crisis times scenario embodies a higher share of hand-to-mouth households, stronger nominal rigidities, and more severe financial frictions, which purportedly better refflect the underlying economic environment during the "Great Recession." Results show that fiscal multipliers can be twice as large in crisis times, being approximately 2 for a government consumptionbased fiscal consolidation in the first year. One-year ahead effects are also substantially larger if this type of consolidation is performed in crisis times. Revenue-based fiscal consolidations are also more recessive in crisis times, though the differences against normal times are less pronounced.

Suggested Citation

  • Gabriela Castro & José R. Maria & Paulo Júlio & Ricardo Mourinho Félix, 2013. "Fiscal multipliers in a small euro area economy: How big can they get in crisis times?," Working Papers w201311, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:wpaper:w201311
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    Cited by:

    1. Vanda Almeida & Gabriela Lopes de Castro & Ricardo Mourinho Félix & Paulo Júlio & José R. Maria, 2013. "Inside PESSOA - A Detailed Description of the Model," Working Papers w201316, Banco de Portugal, Economics and Research Department.
    2. Jasmin Sin, 2016. "The Fiscal Multiplier in Small Open Economy; The Role of Liquidity Frictions," IMF Working Papers 16/138, International Monetary Fund.
    3. Ian Borg, "undated". "Fiscal Multipliers in Malta," CBM Working Papers WP/06/2014, Central Bank of Malta.
    4. Siming Liu, 2018. "Government Spending during Sudden Stop Crises," Caepr Working Papers 2018-002 Classification-E, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
    5. Martha López, 2016. "Fiscal Multipliers, Oil Revenues and Balance Sheet Effects," Borradores de Economia 976, Banco de la Republica de Colombia.

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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