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Defence date: 22 May 2015 ; Examining Board: Prof. Evi Pappa, EUI, Supervisor; Prof. Fabio Canova, EUI; Prof. Giuseppe Fiori, North Carolina State University; Prof. Nora Traum, North Carolina State University. ; This thesis investigates three questions on fiscal policy that have gained importance in the recent turbulent times of general economic decline, labelled as the Great Recession. The first chapter examines how government spending multipliers can vary depending on the location of the debt holder. Empirically, we find that fiscal multipliers are larger when government purchases are financed by issuing debt to non-resident foreign investors, than to resident home investors. Using a theoretical model we then show how the location of the government debt holder produces these di?erential responses through the extent that investment is crowded out in each case. Increasing international capital mobility of the resident private sector can attenuate the di?erence between the two types of financing. The second chapter contributes to the current debate on fiscal sustainability and fiscal coordination in currency unions. It does so using a large-scale New-Keynesian DSGE model calibrated to the EA South and EA North, and fed with a particular fiscal policy scenario identified using the guidelines of the Stability and Growth Pact. The results suggest that when monetary policy is constrained by the zero-lower bound an expansion in the EA North o?sets a consolidation in the EA South leading to a union-wide increase in output. The third chapter studies the effects of fiscal policy in a setting where crisis shocks propagate through the real exchange rate to generate distortions in labour and financial markets. The joint presence of labour market and financial frictions, modelled as downward nominal rigid wages and a collateral constraint on private borrowing, endogenously generate unemployment and persistently high debt levels. Fiscal policies aiming to stimulate or consolidate the economy affect the movement of the real exchange rate in such a way so as to generate it toothless in the face of a 'debt-unemployment' trade-off.

AbstractThis paper finds that debt-financed fiscal multipliers vary depending on the location of the debt buyer. In a sample of 33 countries fiscal multipliers are larger when government purchases are financed by issuing debt to foreign investors (non-residents), compared to when they are financed by issuing debt to home investors (residents). In a theoretical model, the location of the government creditor produces these differential responses through the extent that private investment is crowded out. International capital mobility of the resident private sector decreases the difference between the two types of financing both in the model and in the data.

This paper finds that debt-financed government spending multipliers vary considerably depending on the location of the debt buyer. In a sample of 33 countries, we find that government spending multipliers are larger when government purchases are financed by issuing debt to foreign investors (non-residents), compared with when government purchases are financed by issuing debt to home investors (residents). A theoretical model (with flexible or sticky prices) shows that the location of the government creditor produces these differential responses to the extent that private investment is crowded out in each case. Increasing international capital mobility of the resident private sector decreases the difference between the two types of financing, both in the model and in the data.

This paper finds that debt-financed fiscal multipliers vary depending on the location of the debt buyer. In a sample of 33 countries fiscal multipliers are larger when government purchases are financed by issuing debt to foreign investors (non-residents), compared to when they are financed by issuing debt to home investors (residents). In a theoretical model, the location of the government creditor produces these differential responses through the extent that private investment is crowded out. International capital mobility of the resident private sector decreases the difference between the two types of financing both in the model and in the data.

We find that debt-financed government spending multipliers vary considerably depending on the location of the debt holder. In a sample of 59 countries we find that government spending multipliers are larger when government purchases are financed by issuing debt to foreign investors (non-residents), compared to the case when government purchases are financed by issuing debt to home investors (residents). In a theoretical model we show that the location of the government debt holder produces these differential responses through the extent that private investment is crowded out in each case. Increasing international capital mobility of the resident private sector decreases the difference between the two types of financing, a prediction, which is also confirmed by the data. The share of rule-of-thumb workers, as well as the strength of the public good in the utility function play a key role in generating model-based fiscal multipliers, which are quantitatively comparable with those of the data. ; The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.

We find that debt-financed government spending multipliers vary considerably depending on the location of the debt holder. In a sample of 59 countries we find that government spending multipliers are larger when government purchases are financed by issuing debt to foreign investors (non-residents), compared to the case when government purchases are financed by issuing debt to home investors (residents). In a theoretical model we show that the location of the government debt holder produces these differential responses through the extent that private investment is crowded out in each case. Increasing international capital mobility of the resident private sector decreases the difference between the two types of financing, a prediction, which is also confirmed by the data. The share of rule-of-thumb workers, as well as the strength of the public good in the utility function play a key role in generating model-based fiscal multipliers, which are quantitatively comparable with those of the data.

The paper analyses quantitative easing (QE) in a dynamic general‐equilibrium model which includes assets of different types and maturity. We explicitly model asset purchases by the central bank and their impact on the central bank's balance sheet. In particular, QE is captured by central bank purchases of long‐term government bonds financed by enhanced liquidity provision to the private sector. With imperfect substitutability between asset classes, QE affects the term premium, stock prices, the exchange rate and the private sector's saving decision. We use the model to simulate the European Central Bank's (ECB's) QE path as announced in early 2015. With six basis points term‐premium reduction the model generates 0.9 per cent effective euro depreciation and raises real GDP in the euro area by 0.3 per cent and prices by 0.5 per cent by 2016. Enduring periods of low interest rates strengthen the expansionary effect of QE in the short and medium term. Frontloading of asset purchases has little impact on output and inflation effects as long as the duration of the balance sheet expansion remains unchanged. Expansionary effects of QE are reduced if the central bank purchases eligible assets from foreign rather than domestic counterparties.

This paper estimates an open-economy dynamic stochastic general equilibrium model with Bayesian techniques to analyse the macroeconomic effects of the European Central Bank's (ECB's) quantitative easing (QE) programme. Using data on government debt stocks and yields across maturities, we identify the parameter governing portfolio adjustment in the private sector. Shock decompositions suggest a positive contribution of ECB QE to annual euro area output growth and inflation in 2015-16 of up to 0.3 and 0.6 percentage points (pp) in the linearised version of the model. Allowing for an occasionally binding zero-bound constraint by using piecewise linear solution techniques raises the positive impact to up to 0.7 and 0.8 pp.

This paper analyses the macroeconomic effects of the ECB's quantitative easing programme using an open-economy DSGE model estimated with Bayesian techniques. Using data on government debt stocks and yields across maturities we identify the parameter governing portfolio adjustment in the private sector. Shock decompositions suggest a positive contribution of ECB QE to EA year-on-year output growth and inflation of up to 0.4 and 0.5 pp in the standard linearized version of the model. Allowing for an occasionally binding zero-bound constraint by using piecewise linear solution techniques raises the positive impact up to 1.0 and 0.7 pp, respectively.