A Public Investment Stimulus in Surplus Countries and Its Spillovers in the EA

Publication date: 1 Feb 2017 | Publication type: National Institute Economic Review | External Author(s): in't Veld, J | JEL Classification: E62, F41, F45 | Journal: National Institute Economic Review Issue 239 | Publisher: Sage Publications, London

The Euro Area recommendations endorsed by the European Council in 2016 called for a differentiation of the fiscal effort by individual Member States, taking into account spillovers across Euro Area countries. This article shows model-based simulations of an increase in public investment in Germany and the Netherlands and their spillovers to the rest of the Euro Area. While spillovers in a monetary union may be small when monetary policy reacts by raising interest rates, when rates are kept constant and the stimulus is accommodated, spillovers can be sizeable. An increase in (productive) spending in Germany and the Netherlands can boost GDP in these countries and also have significant positive spillovers on the rest of EA GDP, while the effects on current accounts are likely to be small. Effects can be even larger when investment is directed to the most productive projects. With low borrowing costs at present, the increase in government debt for surplus countries will be modest, while there could be an improvement in debt ratios in the rest of the Euro Area.

Keyword tags: 
fiscal policy
Monetary policy accommodation
Euro Area