Veld, Jan in ‘t, (2016), “Public Investment Stimulus in Surplus Countries and their Euro Area Spillovers”, European Commission, Economic Brief 016, August
This note describes model simulations that broadly confirm the view that at the current juncture, with monetary policy constrained by the zero interest rate floor, a debt-financed increase in government investment in surplus countries will have positive GDP spillovers to the rest of the euro area. If monetary policy cannot be accommodating, GDP spillovers may be small, but when policy rates are held constant for two years, spillovers can be significant. An increase in (productive) spending in Germany and the Netherlands can boost GDP in these countries and also have significant positive spillovers on the rest of EA GDP, while the effects on current accounts are likely to be small. Effects can be even larger when investment is directed to the most productive projects. With low borrowing cost at present, the increase in government debt for surplus countries will be modest, while there could be an improvement in debt ratios in the rest of the euro area.
Relevant Posts
- Cavallo, Eduardo, Eichengreen, Barry, Panizza, Ugo, (2016), “Can Countries Rely on Foreign Saving for Investment and Economic Development?”, CEPR, Αugust
- Rodrik, Dani, (2016), “The Return of Public Investment”, Project Syndicate, 13 January