Intra-Euro Area Spillovers – Simulating the Effects of Fiscal Stimulus

This is a preview from the National Institute Economic Review, August 2018, no 245.

This Box, prepared by NIESR Economist Marta Lopresto, addresses the heterogeneity of fiscal positions in the Euro Area, with a view to examining the effectiveness of fiscal expansions undertaken individually and collectively in stimulating aggregate demand in the monetary union.

The analysis uses the National Institute’s Global Econometric Model (NiGEM) to examine the effect of a co-ordinated Euro Area fiscal expansion and an expansion conducted by member states in isolation. The different scenarios simulate an expansion to government spending of the same magnitude (1 per cent of GDP) and duration (for two years), before they gradually revert to baseline. Monetary policy and exchange rates are kept exogenous for the duration of the shock.

"Many factors would contribute to the size of the final effect of a fiscal expansion. These results, however, provide a basis for ranking the effectiveness of various policies either co-ordinated across countries or undertaken in isolation. If a fiscal boost is implemented simultaneously, the fiscal multipliers are larger for all countries in the monetary union, with the trade spillover channel accounting for some 30 per cent of the average rise in output".