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Barcelona GSE Working Paper No. 549

Title: Fiscal Policy, Pricing Frictions and Monetary Accommodation
Authors: Fabio Canova and Evi Pappa
Date: 15-03-2011
Published in: Economic Policy, 26 (68), 555-598 (2011)
Keywords: Government consumption expenditure shocks; pricing frictions; monetary policy accommodation; debt and inflation dynamics
JEL Codes: C32, E62, E63
We investigate the theoretical conditions for effectiveness of government consumption expenditure expansions using US, Euro area and UK data. Fiscal expansions taking place when monetary policy is accommodative lead to large output multipliers in normal times. The 2009-2010 packages need not produce significant output multipliers, may have moderate debt effects, and only generate temporary inflation. Expenditure expansions accompanied by deficit/debt consolidations schemes may lead to short run output gains but their success depends on how monetary policy and expectations behave. Trade openness and the cyclicality of the labor wedge explain cross-country differences in the magnitude of the multipliers.
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