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dc.contributor.author Broner, Fernando
dc.contributor.author Martin, Alberto
dc.contributor.author Ventura, Jaume
dc.contributor.other Universitat Pompeu Fabra. Departament d'Economia i Empresa
dc.date.accessioned 2024-11-14T10:10:12Z
dc.date.available 2024-11-14T10:10:12Z
dc.date.issued 2020-02-01
dc.identifier https://econ-papers.upf.edu/ca/paper.php?id=1715
dc.identifier.citation IMF Economic Review, 69(1), 2021, 122-154
dc.identifier.uri http://hdl.handle.net/10230/44785
dc.description.abstract We analyze the conduct of fiscal policy in a financially integrated union in the presence of financial frictions. Frictions create a wedge between the return to investment and the union interest rate. This leads to an over-spending externality. While the social cost of spending is the return to investment, governments care mostly about the (depressed) interest rate they face. In other words, the crowding out effects of public spending are partly "exported" to the rest of the union. We argue that it may be hard for the union to deal with this externality through the design of fiscal rules, which are bound to be shaped by the preferences of the median country and not by efficiency considerations. We also analyze how this overspending externality - and the union's ability to deal with it effectively - changes when the union is financially integrated with the rest of the world. Finally, we extend our model by introducing a zero lower bound on interest rates and show that, if financial frictions are severe enough, the union is pushed into a liquidity trap and the direction of the spending externality is reversed. At such times, fiscal rules that are appropriate during normal times might backfire.
dc.format.mimetype application/pdf
dc.language.iso eng
dc.relation.ispartofseries Economics and Business Working Papers Series; 1715
dc.rights L'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commons
dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.title On Public Spending and Unions
dc.title.alternative
dc.type info:eu-repo/semantics/workingPaper
dc.date.modified 2024-11-14T10:07:03Z
dc.subject.keyword public spending
dc.subject.keyword crowding out
dc.subject.keyword financial frictions
dc.subject.keyword fiscal union
dc.subject.keyword spending externalities
dc.subject.keyword fiscal coordination
dc.subject.keyword Macroeconomics and International Economics
dc.rights.accessRights info:eu-repo/semantics/openAccess

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