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

Author(s): Werner Roeger, Jan in 't Veld (European Commission)

Fiscal stimulus and exit strategies in the EU: a model-based analysispdf(528 kB) Choose translations of the previous link 

Summary for non-specialistspdf(87 kB) Choose translations of the previous link 

This 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.

(European Economy. Economic Papers 426. September 2010. Brussels. PDF. 39pp. Tab. Graph. Bibliogr. Free.)

KC-AI-10-426-EN-N (online)
ISBN 978-92-79-14912-2 (online)
ISSN 1725-3187 (online)
doi: 10.2765/44208 (online)

JEL classification: E21, E62, F42, H31, H63

Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.

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