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Government expenditure composition and fiscal policy spillovers in small open economies within a monetary union

Read publication: Journal of Marcroeconomics Volume 48, June 2016, Pages 305–326

Author: Daragh Clancy | Senior Economist at the European Stability Mechanism with P. Jacquinot and M. Lozej

Abstract:

We examine the implications of government expenditure that is complementary to private consumption, and government investment that can improve the productivity of private capital, in a global DSGE model. We show that government investment can improve an economy’s external competitiveness and stimulate private investment. If governments can finance this investment by reducing consumption that is not complementary to private consumption, then this is ex-ante budget-neutral, provides a small, but persistent stimulus without a deterioration in competitiveness, and leads to lower debt in the medium run. We also examine the cross-border transmission channels of government expenditure shocks in a monetary union when government consumption is complementary to private and public investment is productive. While both assumptions enhance cross-border spillovers, a direct import content is required to generate spillovers similar to those found in the empirical literature.

Published online: June 2016

Source: Journal of Macroeconomics | Vol. 48, pp. 305 - 326

Copyright © 2016 Elsevier Inc.

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