Abstract
The aim of this chapter is to characterize the response of prices and GDP to monetary policy and fiscal shocks in a group of Euro-area countries affected by high public and/or private debt-to-GDP ratio. We utilize the structural near-VAR methodology, by jointly modeling Euro area-wide and national variables. We find that during the EMU period, in Italy, Greece and Portugal a fiscal tightening caused a contraction of aggregate output. Instead, for Ireland, Netherland and Spain we find an opposite result: fiscal austerity exerted expansionary effects on the economy. However, in almost all the countries included in this investigation, fiscal shocks explain only a small part of the variability of both output and prices, while a greater role seems to have been played by monetary policy shocks and, more generally, by Euro-area common shocks. The exception is represented by Greece, where fiscal shocks played a notable role as drivers of aggregate output fluctuations.
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Notes
- 1.
We have extensively discussed the main results shown in the literature on the macroeconomic outcomes of fiscal shocks in Chap. 3.
- 2.
- 3.
An important area of research concerns the convergence (and the divergence) of inflation rates in the Eurozone. Some results are presented in Cavallo and Ribba (2014). The authors use monthly data and investigate the convergence of inflation rates in the Euro Area over the period 1999:1–2011:12. The main findings are that only a small number of countries, including France, Italy and Belgium exhibits convergence of inflation dynamics. Thus, diverging results have characterized the inflation differentials in the Euro Area in the first 13 years of Monetary Union. Nevertheless, it should be pointed out that in recent years, mainly through painful deflations in the Mediterranean countries, further improvements in the reduction of inflation differentials have been achieved.
- 4.
More precisely, due to data availability the sample starts in 2002:Q1 for Ireland. For all the other countries the data start in 1999:Q1. The sample ends in 2016:Q3 for the six countries included in this investigation.
- 5.
- 6.
- 7.
The ESI is computed by the Commission’s Directorate General for Economic and Financial Affairs as a composite confidence indicator.
- 8.
Or, at a minimum, the identification strategy adopted allows an appreciable characterization of the dynamic effects of monetary policy shocks on nominal and real variables. The emergence of the price puzzle is not uncommon in VAR models in which structural disturbances are identified by imposing a contemporaneous causal structure. See, among others, Christiano et al. (1999).
- 9.
Of course, we are implicitly maintaining that our estimated linear model allows a proper representation of the economic and monetary dynamics in the Euro Area and that, as a consequence, asymmetric effects of monetary policy (in terms of different effects exerted in expansionary with respect to recessionary phases of the economy) are negligible.
- 10.
We have also checked the robustness of the estimated results shown in this section to changes in the setting of confidence bands. We find that the results do not change significantly if we set the error bands to the 10th and the 90th percentiles.
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Cavallo, A., Dallari, P., Ribba, A. (2018). The Macroeconomic Effects of Fiscal Shocks in High Debt Euro Area Countries. In: Fiscal Policies in High Debt Euro-Area Countries. Springer, Cham. https://doi.org/10.1007/978-3-319-70269-8_4
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DOI: https://doi.org/10.1007/978-3-319-70269-8_4
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