Sovereign Risk, Monetary Policy and Fiscal Multipliers: A Structural Model-Based Assessment

Abstract

AbstractThis paper briefly reviews the literature on fiscal multipliers and then presents results for the Italian economy obtained by simulating a dynamic general equilibrium model that allows for the possibility (a) that the zero lower bound may be binding and (b) that the initial public debt-to-GDP ratio may affect the financing conditions of the public and private sectors (sovereign risk channel). The results are the following. First, the public consumption multiplier is in general less than 1. Second, it goes above 1 only under extremely strong assumptions, namely the constancy of the monetary policy rate for an exceptionally long period (at least 5 years) and full time-coincidence between the fiscal and the monetary stimuli. Third, when the sovereign risk channel is active the government consumption multiplier is much lower. Fourth, in all cases tax multipliers are lower than government consumption multipliers. Finally, we make a tentative assessment of the fiscal consolidation measures enacted in Italy in 2011–2012: the evidence is that the impact on GDP was much weaker than the IMF had expected.KeywordsSovereign Risk PremiaFiscal MultipliersMonetary Policy RateFiscal ConsolidationDSGE ModelThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.