The effectiveness of the European Economic Recovery Plan - the fiscal policy multiplier
School of Business | Bachelor's thesis
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AbstractThe European Economic Recovery Plan (EERP) was a large stimulus package initiated by the European Commission and the euro member states to tackle the negative effects of the global financial crisis. This thesis studies the effectiveness of EERP by reviewing the studies behind the fiscal policy multiplier. The primary focus is on the newest research in the euro are context. Based on the literature review, it’s evident that EERP had positive effects on the real GDP growth. The focus of this thesis was both on the theories and models on the determinants of effective fiscal policy and on empirical studies estimating the multiplier. When EERP was launched, interest rates were closing the zero lower bound, which historically and theoretically leads to more effective fiscal policy. Several studies that use modern DSGE-models with the assumptions of co-existing Ricardian and non-Ricardian households estimate the fiscal policy multiplier for the EERP to have been positive but under unity in the short run, in the zero-interest context that prevailed. In the long run, the effects were estimated to be more moderate, under some assumptions even negative. The studies suggest that the expenditure-side actions were more effective compared to the revenue-side actions. The argument that the growing debt levels in the euro area would ultimately undermine the fiscal stimulation and reduce the multiplier is one of the complexities beyond this review.
Thesis advisorMustonen, Mikko
fiscal stimulus, European Economic Recovery Plan, zero lower bound, revenue side fiscal policy action, government spending, rule-of-thumb houselholds, fiscal policy multiplier