Government Expenditure Composition and Fiscal Policy Spillovers in a Small Open Economy Within a Monetary Union
Download PDF: Working Paper 4
This paper shows that productive government investment can improve an economy’s external competitiveness and stimulate private investment.
Author: Daragh Clancy | Senior Economist at the European Stability Mechanism
with Pascal Jacquinot | European Central Bank
and Matija Lozej | Central Bank of Ireland
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 literature.
This paper was also published in the Journal of Macroeconomics in April 2016
Disclaimer: This Working Paper should not be reported as representing the views of the ESM. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the ESM or ESM policy. No responsibility or liability is accepted by the ESM in relation to the accuracy or completeness of the information, including any data sets, presented in this Working Paper.
JEL codes: E22, E62, H54