Government expenditure composition and fiscal policy spillovers in small open economies within a monetary union |
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| Institution: | 1. European Stability Mechanism, Luxembourg, Luxembourg;2. European Central Bank, Frankfurt am Main, Germany;3. Central Bank of Ireland, Dublin, Ireland;1. EPEE, University of Evry, France;2. Birzeit University, Al BÄ«rah, Ramallah and AlBireh, Palestinian Territory;3. Aix-Marseille University, (Aix-Marseille School of Economics)-CNRS-EHESS & EDHEC Business School, France;1. Vienna University of Economics and Business, Department of Economics, Institute for International Economics, Welthandelsplatz 1, 1020 Vienna, Austria;2. University of Portsmouth, Department of Economics and Finance, Portsmouth Business School, Portland Street, Portsmouth PO1 3DE, United Kingdom;3. Bournemouth University, Accounting, Finance and Economics Department, 89 Holdenhurst Road, Bournemouth, Dorset BH8 8EB, United Kingdom;1. Norges Bank, Norway;2. National Bank of Belgium, Belgium |
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| 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. |
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