We present an analytically tractable two-country New Open Economy Macroeconomics model of a currency union featuring an overlapping gen- erations structure of the Blanchard (1985)-Yaari (1965) type. It enables us to study the transmission and spillover effects of a wider range of fiscal shocks in comparison to the standard model. We show that, depending on the financing decision of the government, fiscal policy measures can have very different effects on key macroeconomic vari- ables such as consumption and output. Moreover, the spillovers of national fiscal policy depend on the composition of government spending, the type of the fiscal measure and the cross-country substitutability between goods.
We present a two-country New Open Economy Macroeconomics model of a currency union featuring an overlapping generations structure of the Blanchard (1985)-Yaari (1965) type as well as monopolistic frictions and staggered adjustment in the goods and labor market. We allow for public investment and distortionary taxation. We study the effects of fiscal policy measures such as public spending, tax cuts targeted to households and public investment as suggested by the Euro- pean Commission (2008). In particular, we explore the effects of fiscal policy as a function of the financing decision of the implementing government. We find that the impact of fiscal measures on national variables as well as the spillovers depend on the assumed degree of household myopia and again, the financing decision of the government. However, the introduction of a complex fiscal sector which enables the government to choose between alternative financing schemes is an important determinant of the effects of fiscal expansions on key macroeconomic variables such as, output and consumptions. Thus, modeling a complex fiscal sector on both sides of the budgets is crucial for the results and therefore the effectiveness of fiscal stimulus packages.
We provide an early assessment of the Juncker Commission's contributions to the ongoing reform of the euro area. In doing so, we present a chronological summary of the reform process up to 2014. At the time, the euro area architecture had undergone many changes. These were mainly focused on risk prevention in the tradition of the original Stability and Growth Pact. The self-proclaimed priority of Juncker was the translation of already agreed upon reforms into European law and to add mechanisms for risk sharing in the public and private sector. Other objectives included kick-starting investment in Europe, increase transparency and democratic accountability and to make the workings of the Commission more visible to improve public support for the common institution. The Juncker Commission faced a Sisyphean task. A slow bur steady euro areawide economic upturn, positive for member states, eased their economic pressures and led to a general reform fatigue. Moreover, the Brexit decision in the United Kingdom absorbed resources as well as attention and made reform decisions that require unanimity among the member states difficult. In Juncker's term, reforms moved at glacial speed, a major breakthrough with regard to adding risk sharing to the euro area architecture could not be achieved. In his term however, the Commission was able to provide considerable support for investment in Europe and to increase public support for the European project which was at a record low when Juncker took office.
We present an analytically tractable two-country New Open Economy Macroeconomics model of a currency union featuring an overlapping gen- erations structure of the Blanchard (1985)-Yaari (1965) type. It enables us to study the transmission and spillover effects of a wider range of fiscal shocks in comparison to the standard model. We show that, depending on the financing decision of the government, fiscal policy measures can have very different effects on key macroeconomic vari- ables such as consumption and output. Moreover, the spillovers of national fiscal policy depend on the composition of government spending, the type of the fiscal measure and the cross-country substitutability between goods.
We present a two-country New Open Economy Macroeconomics model of a currency union featuring an overlapping generations structure of the Blanchard (1985)-Yaari (1965) type as well as monopolistic frictions and staggered adjustment in the goods and labor market. We allow for public investment and distortionary taxation. We study the effects of fiscal policy measures such as public spending, tax cuts targeted to households and public investment as suggested by the Euro- pean Commission (2008). In particular, we explore the effects of fiscal policy as a function of the financing decision of the implementing government. We find that the impact of fiscal measures on national variables as well as the spillovers depend on the assumed degree of household myopia and again, the financing decision of the government. However, the introduction of a complex fiscal sector which enables the government to choose between alternative financing schemes is an important determinant of the effects of fiscal expansions on key macroeconomic variables such as, output and consumptions. Thus, modeling a complex fiscal sector on both sides of the budgets is crucial for the results and therefore the effectiveness of fiscal stimulus packages.
This thesis consists of three separate, but interlinked chapters on national fiscal policy in a monetary union. Throughout, I employ new Keynesian models that are augmented by the introduction of overlapping generations of the Blanchard-Yaari type. The first chapter presents an analytically tractable two-country model of a currency union, which abstracts from distortions other than sticky prices in the goods market and failures of the Ricardian equivalence. Here, the government chooses a certain level of public spending. The government's options of financing its public spending are limited to public debt or taxation. I find that, depending on the financing decision of the government, fiscal policy measures can have very different effects on key macroeconomic variables. The spillovers of national fiscal policy depend on the composition of government spending, the type of the fiscal measure and the cross-country substitutability between goods. The second chapter restricts the attention to a new Keynesian closed economy model that features public as well as private investment. The government is in a position to employ either spending-side measures, i.e. cuts in public consumption, or improve public revenues in order to finance a temporary fiscal expansion. Both, the financing decision as well as possible failures of the Ricardian equivalence have a large impact on how fiscal measures affect key macroeconomic variables. The results suggest that a single deviation from the standard model, e.g. failures of the Ricardian equivalence, is not sufficient to reconcile theory and empirical evidence. The last chapter builds on these findings and develops the issue further by extending the model of chapter 2 to a two-country model of a currency union. I focus on fiscal measures that are frequently employed in practice. When assessing the impact of central components of the European Economic Recovery Plan on the economy of the implementing country, I look also at the implied spillovers. Finally, a brief summariy of some major results of the three chapters: Failures of the Ricardian equivalence enable theoretical models to yield predictions that are close to empirical evidence. However, this comes at the price of deviating from the Ricardian equivalence in a way which cannot be confirmed empirically. The introduction of a more complex fiscal sector and the assumption that fiscal policy is endogenous, allows for moving theoretical predictions closer to the empirical evidence without having to rely crucially on deviations from Ricardian behavior. My results suggest that focusing on distortions in intertemporal optimization is a too narrow approach to tackle with research questions related to the conduct and effects of fiscal policy in theoretical models.
