Abstract

Small open economies within the European Union can be extensively influenced by the utilization of the structural and investment EU funds. Even more so if they are eligible to draw from Cohesion Fund targeted at the developed EU countries. In many of these countries, we observe an EU-funds cycle that causes spikes in total investment as the programming period draws to its end, and a decline after the new programming period begins. As the share of EU-funded public investment and the public investment funded from domestic sources varies highly over time, we decided to explore the differences in the transmission of these two types of public investment shocks into the real economy. We use a version of EAGLE model calibrated for Slovak economy integrated in the euro area and extended with EU funds mechanisms. We find that if the part of the total investment that is funded from domestic sources comes from an increase in taxes, the EU-funded investment delivers larger improvement in real GDP. The difference is especially striking for investment funded by an increase of social security contributions paid by firms. Debt-financed public investment delivers virtually the same results irrespective of whether it is funded from the EU funds or not.

Highlights

  • The European Structural and Investment Funds (ESIF) provide fiscal transfers from the richer EU Member States to the countries and regions that are lagging behind in terms of per capita GDP

  • As the share of EU-funded public investment and the public investment financed from domestic sources varies highly over time, we decided to explore the differences in the transmission of these two types of public investment shocks into the real economy

  • In order to simulate shocks in public investment funded either wholly from domestic sources or with co-financing from EU funds, we introduce another extension of the model inspired by the expenditure side of the budget constraint of the government we added the part of EU funds that is sent as a payment to the European union, EUtOUT, and on the revenue side, we added a variable EUtIN that tells us the amount of money that comes to the country from the EU

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Summary

Introduction

The European Structural and Investment Funds (ESIF) provide fiscal transfers from the richer EU Member States to the countries and regions that are lagging behind in terms of per capita GDP. Funds for regional and cohesion policy allocated for period 20142020 amount to €351.8 bn, € 15.3 bn of which are allocated for the Slovak Republic This represents an average of 2.830 euro per person from the EU budget over the period 2014-2020. The aim of this paper is to evaluate the potential impact of Structural and Cohesion Fund programmes for the small open economy that is part of the euro area and which is a net recipient of the funds. We use the multi-country model of the euro area - EAGLE], its fiscal extension that incorporates productive government spending and investment, and we introduce another extension that allows us to explore the effects of changes in the drawing of the EU funds. The rest of the paper is organized as follows: Section 2 describes the main features of the EAGLE model and its extensions; Section 3 summarizes the calibration of the model; Section 4 contains the main contribution of this paper – the impulse response analysis; and the final section concludes

The EAGLE and its extension
Modelling of public investment and EU funds
Calibration
Impulse Response Analysis
Autonomous government investment shock
EU funds shock
Comparison
Findings
Conclusion
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