Fiscal Policy in the EU in the Crisis: A Model-Based Approach

Abstract

This paper uses a multi region DSGE model with collateral constrained households and residential investment to examine the effectiveness of fiscal policy stimulus measures in a credit crisis. The paper explores alternative scenarios which differ by the type of budgetary measure, its length, the degree of monetary accommodation and the level of international coordination. In particular we provide estimates for New EU Member States where we take into account two aspects. First, debt denomination in foreign currency and second, higher nominal interest rates, which makes it less likely that the Central Bank is restricted by the zero bound and will consequently not accommodate a fiscal stimulus. We also compare our results to other recent results obtained in the literature on fiscal policy which generally do not consider credit constrained households.

Keywords: Fiscal Policy, Monetary Policy, Fiscal Multiplier, Collateral Constraint, DSGE modelling

JEL Classification: E21, E62, F42, H31, H63