Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/272344 
Year of Publication: 
2022
Series/Report no.: 
BGPE Discussion Paper No. 216
Publisher: 
Friedrich-Alexander-Universität Erlangen-Nürnberg, Erlangen und Nürnberg
Abstract: 
This paper analyzes the effects of time-varying fiscal policy behavior on output and consumption multipliers within a monetary union. The framework is that of a standard New Keynesian twocountry model with distortionary taxes and Calvo price rigidities. I first show that multipliers differ significantly across fiscal regime mixes that follow a two-state Markov switching process. For each country, I differentiate between active, where spending is mainly deficit-financed, and passive, when spending is mainly tax-financed, behavior. Since this analysis is based on the Euro Area, I abstract from fiscal-monetary interaction and focus on member and union fiscal interdependence, including monetary imperfections and trade effects. My calibration results show that consumption multipliers to be small and negative. However, the output multiplier is positive and possibly larger than one, depending on the persistence and openness of a country. Moreover, the optimal fiscal regime mix is a combination of active/passive since the negative wealth effect is lowest and the terms of trade loss are the smallest.
Subjects: 
Fiscal Policy
Fiscal Multiplier
Multiplier
European Monetary Union
Regime Switching
Fiscal Policy Rules
JEL: 
R0
R11
R14
R21
R31
Document Type: 
Working Paper

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