"Public investment and monetary policy stance in the euro area"
Joint with Alberto Locarno, Alessandro Notarpietro, and Massimiliano Pisani.
First version: December 2017.
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.
public investment, fiscal policy, monetary policy, euro area.
E52, E62, F41, F42.
Working paper versions:
Temi di discussione (Working papers) 1150, Bank of Italy (2017).
- Banca d'Italia, Annual Report, 31 May 2017