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A Public Investment Stimulus in Surplus Countries and Its Spillovers in the EA

Published online by Cambridge University Press:  01 February 2017

Jan in't Veld
Jan in't Veld*
Affiliation:
DG Economic and Financial Affairs, European Commission
*
E-mail: jan.intveld@ec.europa.eu
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Abstract

The Euro Area recommendations endorsed by the European Council in 2016 called for a differentiation of the fiscal effort by individual Member States, taking into account spillovers across Euro Area countries. This article shows model-based simulations of an increase in public investment in Germany and the Netherlands and their spillovers to the rest of the Euro Area. While spillovers in a monetary union may be small when monetary policy reacts by raising interest rates, when rates are kept constant and the stimulus is accommodated, spillovers can be sizeable. An increase in (productive) spending in Germany and the Netherlands can boost GDP in these countries and also have significant positive spillovers on the rest of EA GDP, while the effects on current accounts are likely to be small. Effects can be even larger when investment is directed to the most productive projects. With low borrowing costs at present, the increase in government debt for surplus countries will be modest, while there could be an improvement in debt ratios in the rest of the Euro Area.

Keywords

Fiscal policyMonetary policy accommodationEuro AreaE62F41F45
Type
Research Articles
Information
National Institute Economic Review , Volume 239 , February 2017 , pp. R53 - R62
Copyright
Copyright © 2017 National Institute of Economic and Social Research

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Footnotes

The views expressed in this paper are those of the author and should not be attributed to the European Commission. This paper is an updated version of in't Veld (2016).

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