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To React or Not? Fiscal Policy, Volatility and Welfare in the EU-3


Malley, Jim; Philippopoulos, Apostolis; Woitek, Ulrich (2007). To React or Not? Fiscal Policy, Volatility and Welfare in the EU-3. Working paper series / Institute for Empirical Research in Economics No. 312, University of Zurich.

Abstract

This paper develops a dynamic stochastic general equilibrium model to examine the quantitative macroeconomic implications of counter-ncyclical fiscal policy for France, Germany and the UK. The model incorporates real wage rigidity which is the particular market failurenjustifying policy intervention. We subject the model to productivity shocks and use either government consumption or investment to react to the output gap or the public debt-to-output ratio. If the objectnof fiscal policy is purely to stabilize output or debt volatility, then our results suggest substantial reductions can be obtained, especiallynwith respect to output. In stark contrast, however, a formal general equilibrium welfare assessment of the volatility implications of thesenalternative instrument/target combinations reveals the welfare gains from active policy, measured as a share of consumption, to be verynmodest.

Abstract

This paper develops a dynamic stochastic general equilibrium model to examine the quantitative macroeconomic implications of counter-ncyclical fiscal policy for France, Germany and the UK. The model incorporates real wage rigidity which is the particular market failurenjustifying policy intervention. We subject the model to productivity shocks and use either government consumption or investment to react to the output gap or the public debt-to-output ratio. If the objectnof fiscal policy is purely to stabilize output or debt volatility, then our results suggest substantial reductions can be obtained, especiallynwith respect to output. In stark contrast, however, a formal general equilibrium welfare assessment of the volatility implications of thesenalternative instrument/target combinations reveals the welfare gains from active policy, measured as a share of consumption, to be verynmodest.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Institute for Empirical Research in Economics (former)
Dewey Decimal Classification:330 Economics
Language:English
Date:February 2007
Deposited On:29 Nov 2011 22:47
Last Modified:10 Aug 2018 05:39
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
OA Status:Green
Official URL:http://www.econ.uzh.ch/wp.html

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