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Adjustment Dynamics in the Euro Area - A Fresh Look at the Role of Fiscal Policy Using a DSGE Approach

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  • G. Russell Kincaid

Abstract

Some researchers have recently introduced productive government investment spending into Dynamic stochastic general equilibrium (DSGE) models, adding a supply channel. This paper takes a similar perspective but it also introduces the government consumption good into the household utility function and this consumption good is supplied by a government production function. While higher government investment can increase private output and household consumption in the future, in the short run household utility is likely to decline because current consumption of private and government goods is shifted into investment and the supply of privately produced consumption goods is reduced. These considerations are especially relevant for euro-area members because fiscal policy is their only national macroeconomic policy tool.

Suggested Citation

  • G. Russell Kincaid, 2008. "Adjustment Dynamics in the Euro Area - A Fresh Look at the Role of Fiscal Policy Using a DSGE Approach," European Economy - Economic Papers 2008 - 2015 322, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    • Handle: RePEc:euf:ecopap:0322
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    File URL: https://ec.europa.eu/economy_finance/publications/pages/publication12596_en.pdf
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    More about this item

    Keywords

    Public investment; Public consumption; Government production function; DSGE models; Euro area; Adjustment Dynamics in the Euro Area ; A Fresh Look at the Role of Fiscal Policy Using a DSGE Approach; Kincaid;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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