The Effects of Fiscal Targets in a Currency Union: A Multi-Country Agent Based-Stock Flow Consistent Model
Alessandro Caiani (Università Politecnica delle Marche)
The Institute of Economics will hold the next meeting of its Seminar Series on Tuesday, May 16, 2017: Alessandro Caiani, from the Università Politecnica delle Marche, will present the paper "The Effects of Fiscal Targets in a Currency Union: A Multi-Country Agent Based-Stock Flow Consistent Model".
The paper presents an Agent-Based Stock Flow Consistent Multi-Country model of a Currency Union to analyze the impact of changes in the fiscal regime of member countries, that is permanent changes in the deficit-to-GDP targets that governments commit to comply. Simulations are performed under three scenarios differentiated for the number of member countries. The configuration employed for the artificial Currency Union yields economically reasonable values for the dynamics of key economic variables, broadly comparable with historical data and available stylized facts, in particular referred to the Euro Area which constitutes the natural point of reference for our work. Policy experiments show that fiscal expansions generally allow to improve the dynamics of real GDP, labor productivity, and employment, though being associated to higher levels of public debt. On the contrary, permanent fiscal contractions have always strong recessive effects and tend to be self-defeating when the Currency Union includes a higher number of countries and international trade between member countries is more prominent, exacerbating real GDP volatility both in the short and long run. The observed increase of average debt-GDP ratios in these scenarios seems to be mainly attributable to the raise of public debt-to-GDP in poorer and less productive countries, which is mirrored by a reduction of the countries’ net foreign asset position.