Non-Ricardian Households and Fiscal Policy in an Estimated DSGE Model of the Euro Area

In this paper, we revisit the effects of government spending shocks on private aggregate consumption within an estimated New-Keynesian DSGE model of the euro area featuring non-Ricardian households and a relatively detailed fiscal policy set up. Employing Bayesian inference methods, we show that the presence of non-Ricardian households is in general conducive to raising the level of aggregate consumption in response to government spending shocks when compared with the benchmark specification without non-Ricardian households. As a practical matter, however, we find that there is only a fairly small chance that government spending shocks crowd in aggregate consumption, mainly because the estimated share of non-Ricardian households is relatively low, but also due to the large negative wealth effect induced by the highly persistent nature of government spending shocksfiscal policy, DSGE models, non-Ricardian households.

Exchange Rate Policy and the Zero Bound on Nominal Interest Rates

In this paper, we study the effectiveness of monetary policy in a severe recession and deflation when nominal interest rates are bounded at zero. We compare two alternative proposals for ameliorating the effect of the zero bound: an exchange-rate peg and price-level targeting. We conduct this quantitative comparison in an empirical macroeconometric model of Japan, the United States and the euro area. Furthermore, we use a stylised micro-founded two-country model to check our quantitative findings. We find that both proposals succeed in generating inflationary expectations and work almost equally well under full credibility of monetary policy. However, price-level targeting may be less effective under imperfect credibility, because the announced price-level target is not directly observable.monetary policy rules, zero interest rate bound, liquidity trap, rational expectations, nominal rigidities, exchange rates

Does Government Spending Crowd in Private Consumption? Theory and Empirical Evidence for the Euro Area

In this paper, we revisit the effects of government spending shocks on private consumption within an estimated New-Keynesian DSGE model of the euro area featuring non-Ricardian households. Employing Bayesian inference methods, we show that the presence of non- Ricardian households is in general conducive to raising the level of consumption in response to government spending shocks when compared with the benchmark specification without non-Ricardian households. However, we find that there is only a fairly small chance that government spending shocks crowd in consumption, mainly because the estimated share of non-Ricardian households is relatively low, but also because of the large negative wealth effect induced by the highly persistent nature of government spending shocks.Government expenditures;Private consumption;Economic models;government spending, fiscal policy, government spending shocks, aggregate consumption, disposable income, taxation, fiscal policy rule, consumption choices, fiscal authority, aggregate demand, level of consumption, fiscal multiplier, tax rates, consumption over time, budget constraint, fiscal policy framework, general equilibrium, consumption tax, consumption spending, intertemporal consumption, government budget, consumption smoothing, consumption patterns, capital accumulation, current income, response of consumption, consumption tax rate, consumption pattern, increase in consumption, fiscal policy rules, government expenditure, consumption expenditure, current disposable income, public finance, consumption level, consumption increases, fiscal variables, tax burden, consumption path, fiscal shocks, consumption choice, consumption decision, fiscal policy on consumption, consumption taxes, business cycles, permanent income

PERSISTENCE, THE TRANSMISSION MECHANISM AND ROBUST MONETARY POLICY

In this paper we first explore the impact of nominal and real persistence on the transmission process of various shocks in an estimated DSGE model of the euro at-ea. We then analyse its impact on optimal monetary policy; and investigate the performance of various monetary policies when the policy maker is uncertain about the degree of nominal and real persistence

Effects of Fiscal Stimulus in Structural Models

The paper assesses, using seven structural models used heavily by policymaking institutions, the effectiveness of temporary fiscal stimulus. Models can, more easily than empirical studies, account for differences between fiscal instruments, for differences between structural characteristics of the economy, and for monetary-fiscal policy interactions. Findings are: (i) There is substantial agreement across models on the sizes of fiscal multipliers. (ii) The sizes of spending and targeted transfers multipliers are large. (iii) Fiscal policy is most effective if it has some persistence and if monetary policy accommodates it. (iv) The perception of permanent fiscal stimulus leads to significantly lower initial multipliers.Budget deficits;Economic forecasting;Economic models;Government expenditures;Public debt;Stabilization measures;Taxes;fiscal stimulus, inflation, real interest rate, aggregate demand, fiscal policy, fiscal multipliers, monetary policy, real interest rates, fiscal instruments, fiscal actions, government spending, fiscal instrument, tax cut, tax cuts, fiscal multiplier, fiscal shocks, tax rates, fiscal policies, discretionary fiscal stimulus, fiscal measures, expansionary fiscal, fiscal action, fiscal deficits, fiscal space, fiscal model, inflation targeting, fiscal shock, fiscal policy actions, fiscal expansion, rate of inflation, fiscal authorities, public finances, fiscal contractions, fiscal deficit, fiscal expansions, government spending multipliers, inflationary pressure, fiscal response, fiscal positions, increase in consumption, fiscal position, tax changes, fiscal balances, fiscal policies division, inflation response, expansionary fiscal contractions, inflation targeting regime, fiscal impulses, fiscal reasons, fiscal measure, primary deficit, fiscal policy rule, public finance, inflationary pressures, fiscal balance, fiscal policy stimulus, government spending shocks, size of multipliers, tax burden, inflation objective, reduction in transfers, increase in expenditures, tax reform, macroeconomic analysis