Working Paper: CEPR ID: DP8955
Authors: Christopher Erceg; Jesper Lind
Abstract: This paper uses a New Keynesian DSGE model of a small open economy to compare how the effects of fiscal consolidation differ depending on whether monetary policy is constrained by currency union membership or by the zero lower bound on policy rates. We show that there are important differences in the impact of fiscal shocks across these monetary regimes that depend both on the duration of the zero lower bound and on features that determine the responsiveness of inflation.
Keywords: currency union; fiscal policy; monetary policy; New Keynesian; small open economy; DSGE model; zero lower bound constraint
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal contraction under independent monetary policy (IMP) constrained by the zero lower bound (ZLB) (E62) | Larger output effects (E23) |
| Government spending cuts (H56) | Deeper output contractions under IMP constrained by the ZLB (E62) |
| Steep Phillips curve (E31) | More pronounced output contraction under IMP (E62) |
| Flatter Phillips curve (E31) | Smaller output contraction under IMP (F41) |
| Output contraction under IMP (E31) | Sensitive to structural characteristics of the economy (L16) |