QUEST II. A multi country business cycle and growth model. Economic Papers No. 123, October 1997. II/509/97-EN

From the Introduction. QUEST was designed to analyse the economies in the member states of the European Union and their interactions with the rest of the world, especially with the United States and Japan. The focus of the model is on the transmission of the effects of economic policy both on the domestic and the international economy. The model was primarily constructed to serve as a tool for policy simulation; less emphasis was put on its ability to serve as a forecasting tool. Given the wide coverage of the model it must necessarily be highly aggregated. A high degree of aggregation and foundation of the specification in current macroeconomic theory also helps in interpreting and understanding the results of the simulations. Finally simplicity also facilitates the solution of the model and reduces the time and memory requirements of the computer-simulations. The new model contains structural models for the EU member states, the US and Japan and distinguishes 10 additional countries/regions in trade feedback models in order to model trade interactions with the rest of the world

Fiscal policy in an estimated open-economy model for the Euro area

This paper uses an estimated DSGE model for the euro area to study the effects of fiscal stabilisation policies. There are at least two features of the euro area economy which makes this analysis interesting. First, there are nominal rigidities in goods and labour markets, and there are financial market frictions with a significant share of liquidity constrained households. Second, the government is a major sector of the euro area economy. In this paper we look at fiscal stabilisation via government consumption, investment, transfers and wage taxes. Empirical evidence is found for systematic countercyclical fiscal policy. Consistent with previous findings, there is a small positive fiscal multiplier in the case of transitory fiscal shocks. It is found that fiscal policy is effective in stabilising GDP in the presence of demand and supply shocks. Fiscal policy helps to reduce the demand externality arising from nominal rigidities. In addition automatic stabilisation via government transfers helps to smooth consumption of liquidity constrained household. Fiscal policy partly compensates the financial market distortion. With distorted goods, labour and financial markets it is found that the estimated fiscal policy rules reduce fluctuations in euro area GDP by about 14 percent.DSGE modelling, fiscal policy, stabilisation policies, euro area, Ratto, Roeger, in't Veld

Cyclical stabilisation under the Stability and Growth Pact: How effective are automatic stabilisers?

It is widely recognised that fiscal policy will have greater responsibilities for cyclical stabilisation in the EMU, given the loss of the monetary instrument at national level. At the same time, the EMU’s budgetary framework emphasises the need to rely on automatic fiscal stabilisers, rather than active policies, in cushioning the business cycle. We show that automatic stabilisers are relatively powerful in the event of a shock to private consumption, but less so as regards shocks to private investment and exports. In respect of supply side shocks, automatic stabilisers are largely ineffective, which may in fact be a good thing to the extent that supply-side disturbances call for structural adjustment rather than cyclical stabilisation. Looking ahead, one of the challenges facing policy-makers will be how to design tax and welfare reforms which, while improving incentives and market functioning, do not stifle – and in fact could strengthen – the impact of automatic stabilisers.cyclical stabilisation; automatic stabilisers; Stability and Growth Pact

Monetary and fiscal policy interactions under a stability pact

Digitised version produced by the EUI Library and made available online in 2020

Cyclical Stabilisation Under the Stability and Growth Pact: How Effective are Automatic Stabilisers?

It is widely recognised that fiscal policy will have greater responsibilities for cyclical stabilisation in the EMU, given the loss of the monetary instrument at national level.At the same time, the EMU's budgetary framework emphasises the need to rely on automatic fiscal stabilisers, rather than active policies, in cushioning the business cycle.We show that automatic stabilisers are relatively powerful in the event of a shock to private consumption, but less so as regards shocks to private investment and exports.In respect of supply side shocks, automatic stabilisers are largely ineffective, which may in fact be a good thing to the extent that supply-side disturbances call for structural adjustment rather than cyclical stabilisation.Looking ahead, one of the challenges facing policy-makers will be how to design tax and welfare reforms which, while improving incentives and market functioning, do not stifle - and in fact could strengthen - the impact of automatic stabilisers