Lorenzo Burlon

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"Public investment and monetary policy stance in the euro area"


Joint with Alberto Locarno, Alessandro Notarpietro, and Massimiliano Pisani.


First version: December 2017.


Abstract This paper evaluates the macroeconomic impact of a programme for public infrastructure spending in the euro area (EA) under alternative assumptions about funding sources and the monetary policy stance. The quantitative assessment is made by simulating a dynamic general equilibrium model of a monetary union with region-specific fiscal policy. The main results are the following. First, EA-wide stimuli are more effective than unilateral (region-specific) stimuli. Second, under EA-wide stimulus, the fiscal multiplier is close to 2 if the forward guidance (FG) on the short-term policy rate holds. Third, if the monetary authority keeps down both the policy rates (with FG) and the long-term interest rates (with quantitative easing), the fiscal multiplier exceeds 3 at peak and investment spending is self-financing. Fourth, the financing method is relevant: debt financing, particularly under an accommodative monetary policy stance and if the sovereign spreads do not increase, is more growth-friendly than tax financing in the short-term (but not in the long-term). Fifth, the effectiveness of the fiscal stimulus is larger if government spending is directed towards productive goods and its implementation occurs efficiently and without delays.

Keywords: public investment, fiscal policy, monetary policy, euro area.

JEL classifications: E52, E62, F41, F42.


Working paper versions:

Temi di discussione (Working papers) 1150, Bank of Italy (2017).


Press releases:

- Banca d'Italia, Annual Report, 31 May 2017