This assumption seems reasonable to us since as we simulate the. Note that in the long run our model represents a closed monetary union and the choice of a public debt to GDP target implies that the sum of public. In the model, this large net external debt is arbitrarily attributed within our regions, and the private assets to GDP ratios will.

In practice, the first order. Baseline shocks. We argue that fiscal shocks starting in. Using Eurostat quarterly data on consumption, investment, output, public debt, inflation and. This approximation. Appendix 2 shows a measure of fit for each variable,. The best fit is obtained with. Underlying structural shocks, their estimated. The financial crisis impact is best characterized. Figure I shows the trajectory under the shocks previously estimated, as well as the point at which the model enters the ZLB, denoted by the.

Under that baseline scenario, output. Public deficits are. Capital returns and interest rates are. Fiscal multipliers. The channels through which fiscal policy. A stimulus package directly boosts domestic demand, with a positive effect on the output of the domestic economy region. It also tends to have inflationary effects in. Observed and simulated data at steady state. S1 correspond to the whole domestic economy, S2 to the rest of the world and S13 to the public sector. This hike will decrease aggregate demand in both the domestic and foreign economies resp.

### Fiscal policy coordination in a monetary union at the zero lower bound

On the other hand, the. Table 2 Key structural parameters calibration. Papers cited for calibration are given as an example of a paper close to the median of our literature review. Parameters name are those in Campagne and Poissonnier The positive effect on domestic demand region A also increases foreign exports, leading to positive spillovers. The net effect on foreign. As detailed in Campagne and Poissonnier b for the purely linear case, those multipliers compare with those. First, as expected, in the case of stimulus packages big enough to immediately lift the Euro Area out of the ZLB, the marginal effect of the last unit spent or raised is constant.

In the case of spending shocks, the impact multiplier is around 1.

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The effect on foreign output, yet relatively small, goes opposite to domestic consolidation or expansion in. Spillovers on foreign. This results from the fact that VAT. However, over three years, spillovers are weaker than for public spending cuts and even slightly negative. Second, at the ZLB, the marginal effect of fiscal. Spending cuts tend to have an increasing. In the case of VAT shocks, the effect is even stronger.

Cooperative governments. As mentioned earlier, those public spending multipliers rely on the simplifying assumption that public consumption gathers the whole public spending while in the current context of low TFP growth in the euro area, international institutions advise changes in the composition of public spending in order to favor public investment and support potential growth. In the long run, public investment shocks are indeed expected to have higher multipliers than public consumption.

However, in the short run, fiscal multipliers tend. In particular,. Policy coordination. Policy objective. However, the realism. Following the crisis,.

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This suggests. Our goal is to analyze how governments in each region could have decided to accelerate or reduce the pace of debt convergence by implementing additional fiscal policies when. For illustrative and simplification. The trajectories correspond to the simulation around the steady state using estimated structural shocks. Reading note: at the beginning of , activity declined by 0.

Simulations with the Meleze model.

We assume governments maximize an objective function or minimize a loss function. We consider a static game, meaning that the government decides in. However, the definition of such preferences is a difficult task and relates to the construction of an adequate objective function for the fiscal. We argue that a reasonable objective function needs to comply with a few constraints or expected properties: i it increases with activity, ii it decreases with the public.

The third property relates to the fact that governments will not seek to boost activity by such an amount that the debt will explode, and vice versa. The fourth property ensures that the further a deviation from the steady state, the costlier it is. Three propagation channels for spillovers of fiscal policy. Namely, in the absence of shocks, we assume that governments will hold to the budget rule and choose to maintain a debt to GDP ratio at its target.

Optimal Policy. Therefore, there is. Outside the ZLB, and following consolidation package in the North, expansionary monetary policy will have positive effects. However negative spillovers will prevail at the ZLB and regional objectives will converge. The optimal amount of coordination will thus differ whether monetary policy can or cannot react. As in Mendoza et al. We also assume than. Each regional government chooses its instrument value so as to maximize the objective functions V i as defined earlier. Given the. North region. Each of these cooperative equilibria is said to.

Although each decision maker will have an idiosyncratic incentive to deviate from the coordinated policy, we assume that they expect that themselves deviating will result in the other decision maker also deviating. Both decision. Note that for all the following figures, shocks. Strategic vs cooperative game. Those first figures can be analyzed along three dimensions:. For a given action of a foreign government,.

How does that optimal domestic strategy. What is the combination of shocks that maximizes. Consider spending shocks from the point of view of the North region top left panel. This choice i. Squares are best responses. Moreover, the. Therefore, a domestic consolidation package would become costlier to the North. This global maximum is out of the range of allowed. A symmetric behavior is observed for the South region.

Consequently, the uncoordinated equilibrium is to increase spending by. VAT shocks, the form of the best responses of. North and South region are similar: due to the. Now, superposing both best responses, Figure V. Panels on the left display the average objective of the entire monetary union when each region are weighed according to their population share, and compares it to the strategic interaction. In both case public spending or. VAT shock , the optimal and strategic equilibria.

Given the level of output. The panels on the right show that for regions weights that are close to the population share, the cooperative. By comparison, Figure VI shows the same graphs, with the same calibration but in the case where monetary policy is never constrained by the ZLB.

In that case, spillovers are smaller or. Indeed, when foreign actions by the other government. Moreover, when spillovers. Given negative spillovers of fiscal expansion in one region. Coordination would therefore lead to more consolidation by both regions than their. Stated in terms of our.

All in all, both regions will be better off at. Second, spillover effects from fiscal policy. Increasing with the size of fiscal consolidation. Outside the ZLB, there are gains from fiscal. At the ZLB however, national objectives tend to be closely related and there are fewer gains from consolidation. The existence of a ZLB and consequently. However, as the recovery strengthens in the Euro Area, and as the normalization of monetary policy is closing in, divergence across national objectives will gradually increase, as well as gains from cooperation.

This sets path for future research on the means. Within the scope of the current paper, future work will focus on the study of more detailed. One main limit of our analysis is the fact that most structural parameters are calibrated. This could be improved,. Lastly, going beyond the retrospective analysis of the crisis and going forward, in the latest environment of low growth, focusing on. As international organizations are now calling for more public investment expenditure, distinguishing between public consumption and investment in the present model will be.

Abiad, M. The macroeconomic effects of public investment: Evidence from advanced economies. Annicchiarico, B. Structural reforms and the potential effects on the. Italian economy. Journal of Policy Modeling, 35 1 , 88— Auray, S. Bayoumi, T. Benefits and Spillovers of Greater Competition in. Europe: A Macroeconomic Assessment. Cacciatore, M. Reforms in Labour and Product Markets. Calvo, G. Journal of Monetary Economics, 12 3 , — Campagne, B. Christiano, L. Journal of Political Economy, 1 , 78— Nominal Rigidities and the Dynamic Effects.

Journal of Political Economy, 1 , 1— Clinton, K. European Economic Review, 55 1 , — Coenen, G. Effects of Fiscal Stimulus in Structural Models. American Economic Journal: Macroeconomics,. Journal of Economic Dynamics and Control, 32 8 , — Economic Modelling, 25 5 , — Corsetti, G. International Journal of Central Banking, 60 March : 05— Cwik, T. Keynesian government spending multipliers and spillovers in the euro area.

Economic Policy, 26 67 , — European Commission Economic Papers. Eggertsson, G. Can structural reforms help Europe? Journal of Monetary Economics, 61, 2— Fiscal consolidation. Journal of Economic Dynamics and Control, 37 2 , — Farhi, E. Chapter 31 — Fiscal. Multipliers: Liquidity Traps and Currency Unions.

In Handbook of Macroeconomics Vol. Forni, L. Macroeconomic Effects of Greater Competition in the. Service Sector: the Case of Italy. Furceri, D. The Effects. Monetary policy, inflation, and the. Princeton: Princeton. Understanding the Effects of Government Spending.

Journal of the European Economic Association, 5 1 , — Guerrieri, L. OccBin: A toolkit for solving dynamic models with occasionally binding constraints easily. Journal of Monetary Economics,. Fiscal consolidations and spillovers in the Euro area periphery and core.

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## The Euro Crisis and the Future of European Integration - OpenMind

Kaplan, G. Brookings Papers on Economic Activity, 0: 0 77— King, R. Mendoza, E. Saving Europe? Cambridge, MA. Ratto, M. Economic Modelling, 26 1 , — Roeger, W.

Fiscal stimulus and. European Commission Economic Papers, 0 1— Fiscal consolidation in Germany. Intereconomics, 45 6 , — Closing small open economy models. Journal of International Economics, 61 1 , — Smets, F. Euro area. An Estimated. Dynamic Stochastic General Equilibrium Model of. Journal of the European Economic Association, 1 5 , — Comparing shocks. Journal of Applied Econometrics, 20 2 , — American Economic Review, 97 3 , — Taylor, J. Discretion versus policy rules in practice. Trabandt, M. The Laffer curve revisited. Journal of Monetary Economics, 58 4 , — Structural reforms, fiscal consolidation.

Economic Modelling, 29 4 , — Appendix 1. First, structural parameters are parameters technology, preferences, etc. Second, policy parameters. These coefficients are solved for a given set of structural. Most structural parameters are calibrated based on the DSGE literature, and in order to set policy parameters to their observed values. First, a few structural parameters are calibrated on National Accounting data.

For the latter,. However, most structural parameters have no direct real world counterparts. Hence, we proceed to an extensive literature review based on Annicchiarico et al. Using this review, we then select a value for each parameter that is close to the median of those observed in the literature, which have been estimated using a range of different methods, such as Bayesian methods on macro data or directly on micro data. However, except for the depreciation rate and the elasticity of substitution between. Therefore, we assume that both our region share the same parameter value often based on euro area values.

Regarding the other mentioned parameters, the depreciation rate, and the elasticity of substitution. However, for an arbitrary calibration of structural parameters, the steady state structure of the model lead to values of the endogenous variables that differ from observed data, for instance the production level. Yet, our model also needs to be able to match some of the main economic indicators as measured in the National Accounts.

As such, having identified a list of structural and policy. In particular, six targets are selected: i the. As explained in more details in Campagne and Poissonnier a , the resolution of steady state equations allows to set the value for some structural parameters by reverse inference. Those six National Accounting targets are calibrated as. The nominal main refinancing interest rate target. Weights for the aggregation across regions are therefore logically based on regional. Lastly, the number of hours worked in each region.

This survey allows to estimate employment in capita terms,. This allows to reconstruct. Appendix 2. Baseline scenario and robustness checks. Measures of fit according various calibrations.

## The Euro Crisis and the Future of European Integration

Measurement errors are allowed in the inflation and. Underlying standardized structural shocks from to Shocks are displayed in percent of estimated standard deviation. Appendix 3. Additional figures. Including the output gap into the Taylor rule should reinforce our results as it will result in a stronger convergence of regional objectives at the ZLB see. In addition, absent official estimations of the Taylor rule, we choose to implement a rule consistent with the official mandate of inflation targeting.

The methodology is presented in more details in the Appendix 1. Results are in line with simulations. This debt to GDP ratio corresponds to public asset net of liabilities as a share of GDP and consequently differs from the debt in the sense of. Maastricht relevant in the Stability and Growth Pact framework. Although, the number of estimated parameters could be deemed as small, we show in Appendix 2 that the estimated values are robust to a number of different calibrations of other parameters. In addition, the purpose. The first essay deals with currency crises, in which the central bank, through setting the interest rate, steers the economy and defends against speculators.

The second essay examines the effects of a rating and possible biases on the coordination of investors and the pricing of debt. In the third essay the author uses forecasts of default probabilities and implied market default probabilities to infer the weighing of information by investors.

Philip Ernstberger is currently working as a senior consultant in the field of risk modeling, concentrating on stress testing and operational risk methodologies, as well as rating model development and validation. JavaScript is currently disabled, this site works much better if you enable JavaScript in your browser. Free Preview. Publication in the field of economic sciences. Buy eBook. Buy Softcover. FAQ Policy. About this book Philip Ernstberger analyses in his three essays different topics of financial pathologies.

Show all. Table of contents 15 chapters Table of contents 15 chapters Introduction Pages Ernstberger, Philip. Literature Pages Ernstberger, Philip.