infonet-economy

This paper develops a dynamic stochastic general equilibrium model to examine the quantitative macroeconomic implications of counter-ncyclical fiscal policy for France, Germany and the UK. The model incorporates real wage rigidity which is the particular market failurenjustifying policy intervention. We subject the model to productivity shocks and use either government consumption or investment to react to the output gap or the public debt-to-output ratio. If the objectnof fiscal policy is purely to stabilize output or debt volatility, then our results suggest substantial reductions can be obtained, especiallynwith respect to output. In stark contrast, however, a formal general equilibrium welfare assessment of the volatility implications of thesenalternative instrument/target combinations reveals the welfare gains from active policy, measured as a share of consumption, to be verynmodest.