THE EFFECT OF INCOME DISTRIBUTION AND FISCAL POLICY ON GROWTH, INVESTMENT, AND BUDGET BALANCE: THE CASE OF EUROPE

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1 FMM-WORKN PAPER No 0 Novembe, 207 Hans-Böckle-Sifun HE EFFE OF NOME DSRBUON AND FSAL POL ON ROWH, NVESMEN, AND BUDE BALANE: HE ASE OF EUROPE homas Obs, Ṏzlem Onaan 2, Maia Nikolaii 3 ABSRA his pape evelops a muli-couny pos-kaleckian eman-le oh moel ha incopoaes he ole of he ovenmen One novely of his pape is o ineae cosscouny effecs of boh chanes in income isibuion an fiscal policy he moel is use o esimae economeically he effecs of income isibuion an fiscal policy on he componens of aeae eman in EU5 counies he esuls sho ha a policy mix ha combines he simulaneous implemenaion of a po-labou ae policy, an expansionay fiscal policy an a poessive ax policy in all EU counies leas o a sinifican ise in he EU5 DP he impac of ae policies is posiive bu small; he oveall simulus becomes much sone ih fiscal expansion his policy mix leas o an impovemen in he bue balance in all he EU5 counies, suesin ha expansionay fiscal policy is susainable hen i is combine ih ae an poessive ax policy Reseach fello, Euopean Univesiy Fankfu (Oe) obs@euopa-unie 2 Pofesso of Economics, eenich Poliical Economy Reseach ene, Univesiy of eenich, FMM Fello 3 Lecue in Economics, eenich Poliical Economy Reseach ene, Univesiy of eenich, FMM Fello

2 he effec of income isibuion an fiscal policy on oh, invesmen, an bue balance: he case of Euope Absac his pape evelops a muli-couny pos-kaleckian eman-le oh moel ha incopoaes he ole of he ovenmen One novely of his pape is o ineae coss-couny effecs of boh chanes in income isibuion an fiscal policy he moel is use o esimae economeically he effecs of income isibuion an fiscal policy on he componens of aeae eman in EU5 counies he esuls sho ha a policy mix ha combines he simulaneous implemenaion of a po-labou ae policy, an expansionay fiscal policy an a poessive ax policy in all EU counies leas o a sinifican ise in he EU5 DP he impac of ae policies is posiive bu small; he oveall simulus becomes much sone ih fiscal expansion his policy mix leas o an impovemen in he bue balance in all he EU5 counies, suesin ha expansionay fiscal policy is susainable hen i is combine ih ae an poessive ax policy Keyos: Wae Shae, oh, Euopean Muliplie, Deman Reime, Fiscal Policy Acknolemens: his pape is pa of he pojec ile An nvesmen an Equaliy-Le Susainable oh Moel fo Euope hich is caie ou joinly by he eenich Poliical Economy Reseach ene (PER), he Founaion fo Euopean Poessive Suies (FEPS), hink-ank fo Acion on Social hane (AS) an Economic ouncil of he Labou Movemen (ELM) We oul like o hank Enelbe Sockhamme, Mehme Uu, an ay Dymski fo helpful commens he usual isclaimes apply JEL coes: E2, E22, E25, E62 oesponin auhos: homas Obs: Reseach fello, Euopean Univesiy Fankfu (Oe) obs@euopa-unie Ṏzlem Onaan: Pofesso of Economics, eenich Poliical Economy Reseach ene, Univesiy of eenich Maia Nikolaii: Lecue in Economics, eenich Poliical Economy Reseach ene, Univesiy of eenich

3 noucion he oubeak of he ea Recession an he sluish oh in he afemah in mos Euopean counies has ekinle inees in he effec of fiscal policy on oh, as evience in he vas lieaue on fiscal muliplie effecs (Blancha an Leih, 203; eche, 205) Alhouh i has been shon ha auseiy policies have neaive effecs on oh an pivae invesmen, conibuin o he polone sanaion in Euope, fiscal conacion coninues o be he ominan Euopean saey in he pos-cisis ea A he same ime, inequaliy has incease sinificanly since he 980s in all he majo evelope an evelopin counies ih a simulaneous fall in he shae of labou income in naional income an a ise in op income shaes (Sockhamme, 207) he neaive impac of inequaliy on oh has been ell evience in empiical eseach base on boh supply-sie oh moels (Bao, 2000; Dauey an acia-penalosa, 2007; Be e al, 202) an pos- Keynesian eman-le oh moels (Naasepa an Som, 2006; Hein an Voel, 2008; Sockhamme e al, 2009; Onaan an alanis, 204; Onaan an Obs, 206) Hoeve, he combine effecs of fiscal policy an income isibuion on oh an fiscal pefomance have no ye been empiically invesiae in he conex of eman-le oh moels heoeically, his issue has been exploe in vaious Kaleckian moels Blecke (2002) an Palley (204) have analyse ho iffeen ax aes on labou an capial income affec hehe he oh eime of an economy is ae-le o pofi-le Mo an Slaey (994), ommenaoe e al (20), Seuino (202), Du (203), Palley (203), an Hein (206), amons ohes, have suie he effecs of income isibuion an ovenmen expeniue on vaious macoeconomic vaiables, such as capial accumulaion, labou pouciviy, inflaion an public eb Blecke (999) has examine open economy issues ihin a Kaleckian moel ih ovenmen expeniue an axes Hoeve, in he Kaleckian lieaue hee is sill a lack of heoeical moels ih coss-couny spill ove effecs of he join effecs of income isibuion an fiscal policy as ell as a eaile empiical analysis he novely of his pape is ofol Fis, e evelop a pos-kaleckian heoeical moel ha incopoaes he ole of he ovenmen ihin an open economy conex he moel moves beyon he above-menione Kaleckian moels because (i) i is a muli-couny moel ha allos he analysis of he ineacions beeen counies an (ii) incopoaes an explici isincion 2

4 beeen iffeen ypes of ovenmen expeniue Secon, e use his moel in oe o esimae economeically he effecs of income isibuion an fiscal policy on he componens of aeae eman (AD) fo each of he EU5 counies We calculae a Euope-ie muliplie base on he esponses of each couny o chanes in no only omesic bu also ohe Euopean counies income isibuion, axaion an ovenmen spenin Hence, e move beyon Onaan an alanis (204) an Onaan an Obs (206) ho pesene he impac of simulaneous chanes in income isibuion in he 20 an he EU5 bu i no incopoae he impac of public spenin an axes Fom a policy pespecive, he analysis of he pape can uie he evelopmen of a fiscal an ae policy mix conucive o equiable evelopmen he es of he pape is oanise as follos Secion 2 oulines he heoeical moel Secion 3 pesens he aa an escibes he esimaion mehooloy Secion 4 pesens he esimaion esuls Secion 5 examines he effecs of ae an fiscal policies on oh, pivae invesmen an he pimay bue balance, an compaes he effecs hen policies ae implemene in one couny in isolaion vesus simulaneously in all counies Secion 6 iscusses ae an fiscal policy mixes an hei implicaions fo oupu, pivae invesmen, an pimay bue balance Finally, secion 7 summaises an conclues 2 A pos-keynesian/pos-kaleckian maco moel ih ovenmen 2 Sucue of he moel Ou muli-couny eman-le oh moel fo he EU5 counies is base on he pos- Kaleckian fameok (see Bhaui an Malin, 990); hoeve, he behavioual funcions also encompass sana Keynesian moels (e Blancha, 2006) We ineae fiscal policy (ax aes, ovenmen expeniue, public eb) ino he pivae seco open economy moel pesene in Onaan an alanis (204) an Onaan an Obs (206) an moel he effecs of a chane in he pofi shae an fiscal policy by means of analysin he couny level effecs on pivae aeae eman: consumpion, invesmen, expos an impos We hen simulae Euopean EU5 efes o he 5 Wes Euopean ol membe saes of he EU, hich inclues he UK espie he Bexi ecision We keep he UK as pa of ou analysis fo Euope, as policy cooinaion issues iscusse in he pape can be implemene even hen counies ae no pa of a poliical union, alhouh e econise he impoance of a poliical union o faciliae such policy cooinaion 3

5 ineacions houh ineain he effecs of a chane in income isibuion as ell as fiscal policy of ohe EU5 counies onsumpion () is iven by: lo = c 0 + c lo( )R + c (lo( )W + lo B + lo(o)) () hee R enoes ajuse pofis W sans fo ajuse aes, enoes implici ax ae (R) on capial income, sans fo R on labou income, B enoes social benefis in cash an O sans fo ohe cuen ansfes Noe ha afe-ax ajuse pofis ae equal o R = ( )R an afe-ax ajuse aes ae iven by W = ( )W ompae o Onaan an Obs (206), consumpion funcion () has o ne feaues: fis, i inclues R on capial income an R on labou income; secon, i incopoaes social benefis in cash an ohe cuen ansfes, hich aumen he isposable income of househols We hypohesise ha a moe poessive ax sysem (hich in his pape is capue by an incease in axes on capial an a ecease in axes on labou) suppos a ae-le economic eime, heeas a moe eessive ax sysem oul help oh in a pofi-le eime Pivae invesmen () is moelle base on o alenaive specificaions Ou fis specificaion is: lo = i a + i y lo p + i π lo( )π+ i lo + i lo(d /) (2) hee ia is auonomous invesmen, p = enoes pivae eman, efine as DP () minus he ovenmen expeniue ha is pa of DP (), π enoes he ajuse pofi shae an D is he ovenmen eb Noe ha he afe-ax ajuse pofi shae is equal o π = ( )π ompae o Onaan an Obs (206), e make hee exensions: fis, e assume ha fims consie afe-ax pofis in makin invesmen ecisions as iely assume in he lieaue (Rohon, 98; Blecke, 2002; Seuino, 202); secon, e inclue public eb as a aio o DP, hich allos us o ake ino accoun possible financial coin ou effecs (Du, 203); hi, e inouce oal ovenmen expeniue in oe o examine poenial coin-in effecs ha mih sem fom he fac ha ovenmen expeniue can impove business envionmen an incease fuue oupu Ou secon alenaive specificaion fo invesmen is he folloin: lo = i a + i y lo p + i π lo( )π 4

6 +i i lo + i c lo c + i i lo i + i lo(d/) (2 ) hee epesens he oss capial fomaion of he ovenmen c enoes he ovenmen collecive consumpion an i is he ovenmen iniviual consumpion ( = + c + i ) he iffeence beeen equaion (2) an equaion (2 ) is ha he lae inclues a isaeaion of ovenmen expeniue ino iffeen caeoies ain boaly on Seuino (202) ho cluses ovenmen expeniue ino invesmen in physical an social infasucue in oe o capue hei iffeen coin-in effecs n equaion (2 ) iniviual consumpion compises social ansfes in kin povie o iniviual househols ollecive consumpion efes o collecive oos an sevices ha ae povie by he ovenmen o all membes of he sociey Boh collecive an iniviual consumpion inclue expeniues elae o healh, eucaion an culue Public invesmen inclues, amons ohes, invesmen in anspoaion, consucion an ohe physical capial We expec ha each of hese ypes of expeniues have a iffeen impac on pivae invesmen Hoeve, ue o sevee aa limiaions ih ahe sho ime seies an mulicollineaiy issues, his eaile specificaion is unlikely o capue poenially sinifican effecs of iffeen ypes of public spenin; heefoe, e pesen he empiical esuls of his specificaion only as a obusness check an inepe hem as inicaive esuls n oe o ineae he effecs of expansionay fiscal policy on oh in EU5 e efine ovenmen expeniue as a facion of DP: 2 = κ (3) Likeise, fo he componens of ovenmen expeniue e have: = κ i (3 ) c = κ c (3 ) i = κ i (3 ) he oal pimay ovenmen expeniue ( o ) is equal o: o = + B + O (4) axes () ae iven by: 2 We assume ha he ovenmen ecies on expansionay fiscal policy aes akin ino accoun he shae of ovenmen expeniue in naional income ahe han he absolue value 5

7 = W + R + c (5) hee c is R on consumpion he eb of he ovenmen seco is: D = D + D PB (6) hee D enoes he lae sock of ovenmen eb, PB = o is he pimay bue balance equal o axes minus oal pimay ovenmen expeniue Fo simpliciy, e assume aay he asse sie of he ovenmen balance shee he inees ae on ovenmen eb () is assume o incease as he ovenmen eb-o-dp aio inceases: = f((d/) ) (7) DP is iven by: = NX (8) hee ne expos (NX) is equal o expos (X) minus impos (M) We moel he effecs of isibuion on ne expos usin a sepise appoach ha follos Sockhamme e al (2009), Onaan e al (20), an Onaan an alanis (204) We exen he specificaion of omesic an expo pices by incluin R on consumpion a home an aboa Domesic pices (P) an expo pices (P x ) ae eemine as follos: lop = p 0 + p ulc lo(ulc) + p c lo( + c ) + p m lop m (9) lop x = p x0 + p xulc lo(ulc) + p cf lo( + cf ) + p xm lop m (0) hee ulc enoes nominal uni labou coss P m sans fo impo pices an cf enoes R on consumpion aboa Expos ae iven by: lox = x 0 + x pxm lo (P x /P m ) + x y lo + x e loe () hee is he DP of he es of he ol an E is he exchane ae Expos ae a funcion of elaive pices of expos o impos, he DP of he es of he ol an exchane ae mpos ae equal o: lom = m 0 + m ppm lo (P/P m ) + m y lo p + m lo + m e loe (2) 6

8 mpos epen on omesic pices elaive o impo pices, he exchane ae an aeae eman in hich e inclue sepaaely p an (see also Palley, 2009) n paallel o he alenaive invesmen specificaion, e also esimae an alenaive specificaion fo impos hee e isaeae ovenmen expeniue ino he hee iffeen ypes as escibe above: lo M = m 0 + m ppm lo (P/P m ) + m y lo p + m i lo +m c lo c + m i lo i + m e loe (2 ) 22 Effecs of a chane in he pofi shae an fiscal policy on aeae eman, pivae invesmen an pimay bue balance he moel pesene above can be eploye o suy he sho-un effecs of a chane in pofi shae (π) an fiscal policy on aeae eman, pivae invesmen an pimay bue balance (he alebaic eails ae epoe in Appenix A) An incease in π has boh fis-oun an secon-oun effecs on AD (see Appenix A) An incease in π ens o euce consumpion (since he popensiy o consume ou of aes is expece o be hihe han he popensiy o consume ou of pofis), incease invesmen (since i aises expece pofiabiliy as ell as he availabiliy of inenal finance) an incease ne expos (since he uni labou cos oes on) hese ae he fis-oun effecs A a secon sae, he chane in oupu ha has been cause by a ise in π has muliplie effecs on AD Noe ha any chane in oupu affecs pivae invesmen no only via is impac on he sales of fims, bu also houh is effec on he ovenmen eb-o-dp aio ha affecs he cos of booin Reain he effecs of π on he pimay bue balance, axes on pofis en o incease, axes on labou en o ecline an, since consumpion eclines an axes on consumpion en o ecease he ovenmen expeniue as a aio o DP oes no chane in esponse o he chanes in oupu (since he ovenmen-o-dp aio is fixe as a policy ecision) Fuhemoe, e focus on hee chanes in fiscal policy (i) an incease in ovenmen expeniue-o-dp aio (κ ), (ii) an incease in he R on capial income ( ) an (iii) a ecease in R on labou income ( ) When κ inceases, ne expos ae neaively affece since he 7

9 ovenmen may buy oos an sevices fom aboa 3 he impac on invesmen is ambiuous since hee ae boh coin-in effecs (a ise in ovenmen expeniue inceases he sales of fims an impoves business envionmen) an coin-ou effecs (iven ha ovenmen inebeness inceases) Hoeve, since he ise in κ simulaes oupu, e also have some secon-oun effecs hese secon-oun effecs en o euce he ovenmen eb-o-dp aio, aenuain he coin-ou impac on invesmen he pimay bue balance ens o ecease because of hihe spenin Hoeve, i can also incease: if oupu inceases, ax evenues ill also incease he eails ae epoe in Appenix A2 An incease in affecs consumpion an invesmen iecly onsumpion eceases since afe-ax pofis ecline nvesmen is avesely affece by loe afe-ax pofis Hoeve, he oveall effec on invesmen is ambiuous because a ise in can eihe incease o ecease he eb-o-dp aio he effec on pimay bue balance is ambiuous as ell: iec axes incease bu he axes on consumpion ecline (see Appenix A3) Simila channels apply hen eceases (see Appenix A4) All he effecs menione above efe only o chanes ha ae implemene in counies iniviually Hoeve, ain on Onaan an Obs (206), ou moel can be applie o analyse he effecs associae ih chanes ha ake place simulaneously in he EU counies his is paiculaly impoan because of he hih ineaion of he Euopean economies he elae calculaions ae epoe in Appenix B Fuhemoe, e analyse he effecs of a policy mix ha combines ae an fiscal policies (see Appenix ) We consie hee policy mixes: (a) A po-labou ae policy combine ih an incease in ovenmen spenin; (b) an incease in combine ih a ecease in (c) a policy mix ha combines (a) an (b) 3 Daa an esimaion mehooloy he aa use in he economeic esimaion efes o EU5 counies an mosly comes fom he annual maco-economic aabase of he Euopean ommission (AMEO) an he OED naional 3 An incease in public spenin pouces an incease in he aes of he public seco employees, affecin he ae shae Fo simpliciy, e assume aay his effec f his effec as aken ino accoun, an incease in public spenin oul povie a fuhe boos o economic aciviy via consumpion 8

10 accouns, in mos cases fo he peio beeen 960 an 203 he ax aes ae base on Euosa aa fo mos counies fo he peio of he efiniions of all vaiables an souces ae in Appenix D n ou economeic esimaions, e focus only on he componens of ovenmen expeniues ha ae pa of DP hese ae he oss capial fomaion, he iniviual consumpion expeniue an he collecive consumpion expeniue of he eneal ovenmen On aveae, i an consiue ouhly 50 pe cen of oal ovenmen expeniue in ou sample An impoan pa of he emainin ovenmen expeniues ae social benefis in cash an ohe cuen ansfes hese have been inclue in ou heoeical moel (see secion 2) bu no in ou empiical esimaions ue o limie aa availabiliy (e social benefis in cash sa only in 995 fo mos EU5 counies) Moeove, in ou economeic esimaions e inclue only he ax evenues, hich ae he bies pa of ovenmen evenues, leavin asie ohe evenue seams such as popey income o naional insuance paymens We esimae sepaae sinle equaions fo consumpion, invesmen, expos, impos, omesic pices an expo pices We choose he sinle equaion appoach (SEA) appoach because i allos a cleae inepeaion of he esuls an pemis us o eal ih he fac ha he ime peio of ou sample is quie sho Hoeve, he main limiaion of he SEA appoach is ha i mih inouce some bias esulin fom enoeneiy issues, hich mih aise fom he fac ha he ae shae an he ovenmen expeniue-o-dp aio ae auably a funcion of oupu hese coul be ackle by usin a VAR o an insumenal vaiable meho Hoeve, as iscusse in Onaan an Obs (206), hese mehos have hei on limiaions Mos impoanly, i is necessay o have a lae numbe of obsevaions, hich is no he case in ou sample Hence, e have chosen o use a SEA appoach, hich is also in line ih he fac ha ou moel is a shoun one, an e have easonably assume ha he ime la of he impac of oupu on isibuion an ovenmen expeniue is lone han one yea Uni oo ess sues ha mos of ou vaiables ae ineae of oe one 4 he pofi shae is saionay in Denmak eece Spain Seen an he UK Hence e use his vaiable in is level in hese counies We fis esimae eo-coecion moels (EM) f no coineaion is 4 Resuls ae available upon eques 9

11 foun, he equaions ae esimae in iffeences We sa ih eneal specificaions an only keep hose vaiables, hich ae saisically sinifican n oe o es fo auocoelaion e use he Beusch-ofey es n he case of auocoelaion, eihe e keep he lae epenen vaiable o a an AR() em As ouline in Onaan an Obs (206), e eive he lon-em coefficiens (elasiciies) usin o iffeen mehos epenin on hehe hee is a sho-un (iffeence fom) o a lon-un elaionship (EM) amon he vaiables 4 Esimaion esuls he esimaion esuls fo ou consumpion funcion (equaion ) ae iven in able he hypohesis ha he mainal popensiy o consume (MP) ou of pofi income is lae han he popensiy o consume ou of ae income is confime in all counies able able 2 pesens he effecs on pivae invesmen base on equaion (2) hee ae posiive saisically sinifican effecs of ovenmen expeniue in 9 EU counies: Ausia, Finlan, eece, emany, elan, he Nehelans, Poual, Spain, an Seen his epesens he vas majoiy of ou sample an hence inicaes he impoance of fiscal expansion fo he simulus of pivae invesmen hee is only one couny (Fance) in hich he effecs of ovenmen expeniue on pivae invesmen ae neaive 5 able 2 We fin son an sinifican acceleao effecs of pivae eman on pivae invesmen in all counies Reain he afe-ax pofi shae, he effecs ae moe vaie has no saisically sinifican effec in 9 counies: Ausia Denmak Finlan emany eece elan Poual Spain an he UK 6 n hese cases, he effecs ae eae as zeo hen e calculae he oal effecs on excess eman We fin sinifican neaive effecs of an incease in public eb on pivae 5 We also foun neaive sinifican effecs fo he UK in he full sample in some specificaions Hoeve, hen unnin a obusness check ih a euce sample pio o he cisis ( ) he sinifican neaive effecs in he UK o no hol ue Hence, e epo he specificaion hee ovenmen expeniue is insinifican an oppe Fo Fance he neaive effecs of ovenmen expeniue hol ue also in he euce sample, hence e keep he oiinal esimaion 6 When e compae ou esuls o pevious finins in he empiical lieaue (Onaan an Obs 206) e fin a eneal beakon of he pofi-invesmen nexus since he sa of he ea Recession in 2007 akin afe-ax pofis his issue becomes even moe appaen Only 5 EU counies have a saisically sinifican pofiabiliy effec 0

12 invesmen, hich epesens evience of coin ou effecs in 8 counies: Belium, Finlan, Fance, elan, Poual, Spain, Seen an he UK Appenix E epos he esimaions fo invesmen specificaion (2 ), hich ecomposes he ovenmen expeniue in i, an As ouline in secion 2, his specificaion is heoeically ou pefee one bu ue o he sho ime seies aa an mulicollineaiy issues, he esimae coefficiens ae no use fo he policy analysis in he nex secions he esuls sho ha public invesmen has sinifican posiive effecs on pivae invesmen in he majoiy of he EU5 counies niviual an collecive ovenmen consumpion expeniues have sinifican posiive effecs on pivae invesmen in some counies ( in Denmak, eece, he Nehelans, Seen, an i in Ausia, Fance, elan, aly, an Poual), bu in some ohe counies he effecs ae eihe insinifican o even neaive he esimaion esuls fo omesic pices, expo pices, expos, an impos ae epoe in ables 3 o 6 he esuls ae in line ih ou expecaions; hoeve, hee ae no sinifican effecs of expo pices elaive o impo pices on expos in Belium, elan, Luxembou, he Nehelans an Poual We also fin no saisically sinifican effecs of omesic pices elaive o impo pices on impos in Denmak, Finlan, emany, eece, Luxembou, an he UK An incease in ovenmen expeniue leas o an incease in impos in 6 counies: Belium, emany, elan, Poual, Seen, an he UK Reain R on consumpion, e fin saisically sinifican effecs on omesic pices in 7 counies: Finlan, elan, aly, Poual, Spain, Seen, an he UK oncenin expo pices e fin saisically sinifican effecs in only 3 counies: Denmak, emany an aly able 3 able 4 able 5 able 6 We have un a seies of obusness checks fo consumpion an invesmen esimaions 7 Fo consumpion, e have checke he obusness of ou esuls usin iffeen sample sizes: ; ; Ou esuls ae obus excep fo Spain Hee, e fin eihe 7 Resuls ae available upon eques

13 insinifican o pevese effecs of pofi income on consumpion fo he full sample, hich is a os ih ou pevious esimaions an he empiical lieaue (Onaan an Obs, 206) 8 Hence, e have kep he full sample fo all EU5 counies, bu Spain, hee esimaion is base on he pe-cisis peio n he case of invesmen, he esuls ae obus if e esimae specificaion 2 fo he pe-cisis peio of Effecs of ae an fiscal policies Usin ou economeic esimaions, e simulae he effecs of a %-poin ecease in he pofi shae (π) on aeae eman, pivae invesmen, an pimay bue balance (policy ; see Appenices A an B fo eails) We consie boh he case in hich his ecease akes place only in one couny iniviually an he case in hich he pofi shae eceases in all counies in he EU5 simulaneously able 7 pesens he esuls olumn A epos ho excess eman chanes as a esponse o an iniviual ecline in he pofi shae of a couny, hich is he sum of he paial effecs of he pofi shae on consumpion, invesmen, ovenmen expeniue an ne expos as a aio o DP hese paial effecs ae pesene in able F in Appenix F (noe ha he ovenmen expeniue/dp oes no chane hen π eclines) hee poins ae oh menionin Fis, in he majoiy of counies he posiive paial effecs of a ecease in π on consumpion ae hihe in compaison ih he esuls pesene in Onaan an Obs (206) his is explaine by he incopoaion of axes aes in he moel, hich ens o incease he iffeences in he popensiies o consume ou of aes an pofis Secon, he paial effec on invesmen of an incease in π is eihe posiive o saisically insinifican hi, all counies, excep Belium, exhibi a aele eman eime neesinly, incopoain he effecs of π on ne expos oes no chane he naue of he eman eime compae o he omesic eman eime able 7 olumn B epos he muliplies, hich capue he secon-oun effecs of he chane in eman inuce by he ecline in π Wih he excepion of Luxembu, he muliplies ae above 8 Esimain a euce sample size ( ) shos ha he pevese effecs ae iven by he sinifican eucion of R on capial fom 42% o 26% uin he cisis peio 2

14 one an ane beeen 4 (elan) an 505 (eece) 9 n compaison o he muliplies esimae in Onaan an Obs (206), hee fiscal policy as no aken ino accoun, he muliplies epoe in able 7 ae hihe fo all counies Noe ha he incopoaion of fiscal policy ens o incease he muliplie because a ise in oupu inceases (since κ is fixe) an eceases he ovenmen eb-o-dp aio Boh of hese effecs incease pivae invesmen Hoeve, i also ens o ecease he muliplie because a ise in inceases impos olumn shos he effecs of a %-poin fall in π on eman an oupu afe he muliplie effecs he counies in hich he posiive oh effecs of a ecline in π ae sone ae eece Spain an emany Mos impoanly, hen he ecline in π akes place in all counies simulaneously (olumn ), he oh effecs ae einfoce n aiion, he only couny (Belium) in hich aeae eman as pofi-le, also exhibis no ae-le oh Oveall, a simulaneous ecline in he pofi shae in all counies leas o an incease in he EU5 DP by 64% 0 olumn D efes o pivae invesmen A % fall in π impoves pivae invesmen in he majoiy of EU5 counies (ih he excepion of Belium, aly, an he Nehelans) When his fall akes place in all counies simulaneously (olumn H), pivae invesmen impoves in all counies On aveae, pivae invesmen in he EU5 inceases by 050%-poins as a aio o DP A fall in π leas o an impovemen in he pimay bue balance in all counies (olumn E) hese posiive effecs ae einfoce hen π eclines simulaneously in all counies (olumn ) A %-poin simulaneous fall in π leas o an impovemen in he pimay bue balance of all counies ue o he fac an incease in he ae shae has posiive effecs on DP he effecs ane fom 005%-poins (UK) o 09%-poins (Spain) Finally, e analyse he exen o hich a ae simulus in he EU5 counies oul exe inflaionay pessues Pices incease by ouhly 3% folloin an isolae ecline in π by %- poin (olumn F) an by 5% if π eclines simulaneously in all counies (olumn J) Hence, he ise in inflaion because of a ae simulus is quie moeae 9 Sockhamme e al (2009) fin muliplies anin beeen 38 an 269 fo he Euo aea 0 Onaan an Obs (206) foun a ecline in EU5 DP by 030% folloin a % fall in he ae shae in Euope 3

15 We no un o he effecs of fiscal policy Policy 2 capues he incease in he ovenmen expeniue-o-dp aio (κ ) by %-poin he effecs of his policy ae pesene in able 8 An incease in κ in each couny iniviually inceases DP sinificanly As shon in olumn he effec anes fom ouhly 056% (Luxembu) o 783% (eece) he effecs become much moe posiive hen all counies incease ovenmen expeniues simulaneously (olumn F) his is ue o hih coss-couny spill-ove effecs Oveall, he EU5 DP inceases by 37% able 8 An incease in ovenmen expeniue also leas o a ise in invesmen (olumn D), inicain ha he coin-in effecs ovepoe he coin-ou effecs Aain, he effec is sone hen fiscal policy is implemene in cooinaion as oppose o in isolaion (olumn ) Hoeve, as shon in olumn E a %-poin incease in κ leas o a eeioaion of he pimay bue in almos all counies (he only excepion is Spain) he eucion anes fom 047%-poins (Ausia) o 098%-poins (eece) his eucion is, hoeve, loe hen ovenmen spenin inceases in all counies simulaneously (see olumn H) Policy 3 efes o a %-poin incease in R on capial income ( ) s effecs ae epoe in able 9 As a esul of an isolae ise in, oupu eceases in all counies excep in Finlan (olumn ) his eucion is slihly sone hen inceases simulaneously in all counies (incluin Finlan) Oveall EU5 DP oul ecease by 03% As expece, a hihe euces consumpion an pivae invesmen an impoves he pimay bue balance (see olumns an H) able 9 able 0 shos he effecs of policy 4, hich capues a %-poin ecease in R on labou income ( ) his policy has a sinifican posiive effec on consumpion, hich leas o boh hihe oupu an pivae invesmen When i is implemene simulaneously in all counies, i causes, on aveae, an incease in he EU5 DP by 68% (see olumn F) an an incease in he EU5 pivae invesmen by 056%-poins (see olumn ) neesinly, he pimay bue he empiical sinificance of spill-ove effecs as ell as he impoance of cooinaion of fiscal policies is also confime in Auebach an oonichenko (203) 4

16 balance impoves as a esul of policy 4 (see olumns E an H) he son posiive effecs on consumpion esul in a sinifican incease in he evenues ha come fom he axaion of consumpion his counebalances he ecease in he axes on labou able 0 6 Policy mix scenaios fo ealiaian oh an susainable fiscal policies n his secion, e se ou he effecs of hee policy mixes: (a) a combinaion of po-labou ae policy an expansionay fiscal policy base on a %-poin incease in he pe-ax ae shae an a %-poin incease in public spenin (policy mix ); (b) a combinaion of a poessive ax policy base on a %-poin fall in he ax ae on aes an a %-poin incease in he ax ae on pofis (policy mix 2), an (c) a policy mix ha combines policies -4 (policy mix 3) he effecs ae pesene in able We consie only he case in hich hese policy mixes ae implemene simulaneously in all counies able olumn A shos ha a combine incease in he ae shae an ovenmen expeniue has lae posiive effecs on oupu of each naional economy ih values anin beeen 240% (elan) an 345% (eece) Oveall, he EU5 DP oul incease by 535% olumn B pesens he impac of policy mix 2 he posiive effecs of a fall in he R on labou income on consumpion oueih he neaive effecs of a ise in he R on capial income on pivae invesmen as ell as consumpion All counies expeience posiive effecs ih values anin beeen 052% (elan) an 34% (Spain) Oveall EU5 DP inceases by 37% he effecs of policy mix 3 ae sones in Finlan (204%), eece (529%), an Spain (65%) (see olumn ) As shon above, in hese counies hee ae lae iffeences in MP, no sinifican effec of π on pivae invesmen an he coin-in effecs on pivae invesmen ae son Oveall, he EU5 DP inceases by 672%, hich is sinificanly hihe han he ohe cases, illusain he impoance of a moe compehensive policy mix of ae, axaion an invesmen policies Policy mix 3 also leas o hihe pivae invesmen in all counies (see olumn D) he effecs ae sones in counies ih sinifican posiive effecs of ovenmen expeniue on pivae invesmen; fo insance, i inceases by 363%-poins in Ausia o 592%-poins in Finlan he 5

17 effecs ae eake in counies ihou sinifican posiive effecs of ovenmen expeniue on pivae invesmen bu ih sinifican neaive effecs of public eb, such as in Belium (098%- poins) o in he UK (094%-poins) Finally, e esimae he impac of policy mix 3 on he pimay bue balance-o-dp aio (see olumn E) his policy mix inceases he pimay bue balance in all counies On aveae, he bue balance in he EU5 counies impoves by 086%-poins 7 onclusion his pape evelope a muli-couny pos-kaleckian heoeical moel aumene by a ovenmen seco he moel as esimae fo EU5 counies an he esuls ee use o examine he effecs of ae an fiscal policies on oh, invesmen an bue balance he empiical analysis has shon ha a simulaneous ecline in he ae shae in a hihly ineae Euopean economy leas o a ecline in oh hee is oom o simulae eman in an economic climae of sluish oh: a %-poin simulaneous incease in he ae shae a he Euopean level coul lea o an incease in EU5 DP by 64% he neaive effecs of a fall in he ae shae on consumpion ovepoe he posiive effecs on invesmen in 4 Euopean counies When consiein afe-ax income, he iffeences in mainal popensiy o consume ou of ae vesus pofi income ae sinificanly lae in he majoiy of he EU5 counies, compae o he pevious empiical lieaue Moeove, he eneal beakon of he pofi-invesmen nexus becomes even moe appaen, hen invesmen is esimae as a funcion of afe-ax pofis Hence, omesic eman is clealy ae-le in he EU5 neesinly, ineain he foein seco oes no lea o a chane in he impac of isibuion on eman since omesic eman is sonly ae-le heefoe, in isolaion, ihou he inenaional spill-ove effecs, e fin 4 counies o be ae le an couny o be pofi-le We fin evience fo boh coin-in an coin-ou effecs of fiscal spenin on pivae invesmen On he one han, ovenmen expeniue enhances pivae invesmen in 9 EU5 counies On he ohe han, public eb has a neaive effec on pivae invesmen in 8 counies Hoeve, he neaive effecs of public eb ae small compae o he posiive effecs of public spenin, inicain ha pivae invesmen is oveall posiively affece by fiscal expansion 6

18 As an oucome of a ae-le ecovey scenaio, he majoiy of he counies oul expeience inceasin pices bu by ell belo 2% his implies ha if he inflaion ae is iniially close o 0%, a ae simulus in he EU5 oul no lea o an inflaion ae hihe han he EB ae inflaion ae of 2% n fac, i oul help keep he Euopean economy aay fom eflaion A combine an simulaneous chane of a %-poin incease in he pe-ax ae shae an %-poin incease in public spenin leas o an incease in he EU5 DP by 535% an hence inicaes he impoance of a compehensive policy mix ha combines ae-le an public invesmen policies in Euope he impac of ealiaian ae policies ae posiive bu small; hoeve hen mixe ih he much sone impac of fiscal expansion, he oveall simulus is much moe effecive in achievin boh aes of income equaliy an son job ceaion he hypohesis ha a moe poessive ax sysem poenially simulaes eman is confime in ou empiical esimaions A eisibuive ax policy leas o an incease in EU5 DP by 37% he posiive effecs of a eucion of he ax ae on aes sinificanly inuce consumpion an hus oueih he neaive effecs on invesmen spenin (an consumpion eman) ue o an incease in he axaion of pofi income Finally, e simulae he impac of a combine policy mix ha inclues a po-labou ae policy, an expansionay fiscal policy an a poessive ax policy As expece, his policy mix leas o much sone oh effecs an inceases he EU5 DP by 672% We also analyse he impac of expansionay fiscal policy on he pimay bue balance A combine policy mix leas o an impovemen in he bue balance in all he EU5 counies he posiive muliplie effecs on eman an oh lea o a ise in axes ha oueihs he avese effecs of hihe ovenmen spenin on he bue balance On aveae, he bue balance impoves by 069%-poins in he EU5 counies Hence, expansionay fiscal policy is susainable hen ae an public spenin policies ae combine ih poessive ax policy; he impac is sone hen hese policies ae implemene in a cooinae fashion acoss Euope ue o son posiive spill-ove effecs on eman Oveall, ou analysis shos ha he incopoaion of axes on capial an labou in he pos- Kaleckian open economy moel inceases he likelihoo of a ae-le eman eime n aiion, he ineaion of public spenin inceases he muliplie effecs an amplifies he aele oucome his hihlihs he impoance of he combinaion of fiscal policy ih policies 7

19 aein a moe equal income isibuion his combinaion is impoan no only fo achievin hihe oh, hihe invesmen an moe susainable fiscal sances, bu also fo achievin ohe cucial social an envionmenal aes, such as lo cabon emissions an ene equaliy he combine use of fiscal an ae policies fo he achievemen of hese aes can be he subjec of fuue eseach 8

20 Refeences AMEO 206 Annual maco-economic aabase of he Euopean ommission Available a: hp://eceuopaeu/economy_finance/ameco/use/seie/selecseiecfm [Accesse 03206] Auebach A J an oonichenko 203 Oupu spilloves fom fiscal policy he Ameican Economic Revie 03:4-46 Bao R J 2000 nequaliy an oh in a panel of counies Jounal of Economic oh 5:5-32 Be A Osy J D an Zeelmeye J 202 Wha makes oh susaine? Jounal of Developmen Economics 98:49-66 Blancha O J 2006 Macoeconomics Ne ok Penice Hall Blancha O J an Leih D 203 oh foecas eos an fiscal muliplies Ameican Economic Revie 03:7-20 Blecke R A 999 Kaleckian maco moels fo open economies n: Depez J an Havey J (es) Founaions of nenaional Economics: Pos Keynesian Pespecives chap 5 Lonon Roulee Blecke R A 2002 Disibuion Deman an oh in Neo-Kaleckian Maco Moels n: Seefiel M (e) he Economics of Deman-Le oh: hallenin he Supply-Sie Vision of he Lon Run helenham, UK an Nohampon, MA: Ea Ela ommenaoe P, Panico an Pino A 20 he influence of iffeen foms of ovenmen spenin on isibuion an oh Meoeconomica 62:-23 Dauey E an acia-penalosa 2007 he pesonal an he faco isibuions of income in a coss-secion of counies Jounal of Developmen Suies 43: Du A K 203 ovenmen spenin, aeae eman, an economic oh Revie of Keynesian Economics :05-9 Euopean ommission 2000 Sucues of he axaion sysems in he Euopean Union Bussels: Euopean ommission Euosa 205 Daabase online ou key o Euopean saisics Available a: hp://eceuopaeu/euosa/eb/poucs-aases/-/ec009 [Accesse 2205] eche S 205 Wha fiscal policy is mos effecive? A mea-eession analysis Oxfo Economic Papes 67: Hein E an Voel L 2008 Disibuion an oh econsiee: empiical esuls fo six OED counies ambie Jounal of Economics 32:479-5 Hein E 206 Auonomous ovenmen expeniue oh, eficis, eb an isibuion in a neo-kaleckian oh moel eam- Wokin Pape Seies N 2/206 Available a: hp://econpapesepeco/pape/csnpape/206-02hm [Accesse 2205] Menoza E, Milesi-Feei an Asea P 997 On he ineffeciveness of ax policy in alein lon-un oh: Habee s supeneualiy conjecue Jounal of Public Economics 66:99-26 Mo an Slaey E 994 ax incience an macoeconomic effecs in a Kaleckian moel hen pofis finance affecs invesmen an pices may espon o axes Jounal of Pos Keynesian Economics 6: Naasepa W an Som S 2006 OED eman eimes ( ) Jounal of Pos Keynesian Economics 29:

21 OED 206 Naional Accouns Available a: hps://sasoeco/nexaspx?daaseoe=naa [003206] Onaan Ö, Sockhamme E an afl L 20 Financialisaion, income isibuion an aeae eman in he USA ambie Jounal of Economics 35: Onaan Ö, Boesch V an Leibech M 202 Ho oes lobalizaion affec he implici ax aes on labo income, capial income, an consumpion in he Euopean Union? Economic nquiy 50: Onaan Ö an alanis 204 ncome isibuion an oh: a lobal moel Envionmen an Plannin A 46: Onaan Ö an Obs 206 Wae-le oh in he EU5 membe-saes: he effecs of income isibuion on oh, invesmen, ae balance an inflaion ambie Jounal of Economics 40:57-55 Palley 2009 mpos an he income-expeniue moel: implicaions fo fiscal policy an ecession fihin Jounal of Pos Keynesian Economics 32:3-322 Palley 203 ambie an neo-kaleckian oh an isibuion heoy: compaison ih an applicaion o fiscal policy Revie of Keynesian Economics :79-04 Palley 204 Rehinkin ae vs pofi-le oh heoy ih implicaions fo policy analysis MK Wokin Pape Duesselof Rohon R 98 Deman, eal aes an economic oh hames Papes in Poliical Economy Auumn -39 epine in Sui Economici (982) 8:3-54 Seuino S 202 Macoeconomics, human evelopmen, an isibuion Jounal of Human Developmen an apabiliies 3:59-8 Sockhamme E 207 Deeminans of he ae shae: a panel analysis of avance an evelopin economies Biish Jounal of nusial Relaions 55():-3 Sockhamme E, Onaan Ö an Eee S 2009 Funcional income isibuion an aeae eman in he Euo aea ambie Jounal of Economics 33:

22 able onsumpion: epenen vaiable lo (equaion ) c lo(- AR DW R 2 )R lo(- )W lo( - ) Sample A (3760) *** (3792) *** (5950) *** B (5795) *** (252) ** (407) *** DK (434) (987) ** (3089) *** FN (5386) *** (4455) *** (6445) *** F (6307) *** (300) *** (5802) *** D (576) (73) * (37) *** (3726) *** R (3396) *** (3902) *** (569) *** (202) ** RL (2036) ** (30) *** (5058) *** (2867) ** (480) *** (3596) *** (3855) *** L (4087) *** (345) *** (4920) *** NL (0040) (3340) *** (3673) *** (4878) *** P (4495) *** (5287) *** (6867) *** E (350) *** (236) ** (532) *** S (2640) ** (0666) (270) *** (924) * UK (3268) *** (4288) *** (676) *** (205) ** Noe: -saisics ae epoe in he paenheses, *, **, an *** san fo 0%, 5%, an % sinificance levels especively Since hee ae no aa fo R on capial income in Luxembu, he eession fo his couny is esimae base on he pe-ax income A = Ausia B = Belium DK = Denmak FN = Finlan F = Fance D = emany R = eece RL = elan = aly L=Luxembu NL = Nehelans P = Poual E = Spain S = Seen UK = Unie Kinom 2

23 able 2 Pivae invesmen: epenen vaiable lo (equaion 2) c lo(- lo p- lo - lo lo - lod/ lo(d / ) - lo - lo p - lo - lo(d / ) - DW R 2 )π - lo(- )π lo(- )π lo p AR Sample A (45) (433) (43) *** (724) * -(62) B (0402) (2667) *** (537) *** -(2766) *** DK (0855) (42) (0928) *** FN (38) *** -(0394) (6958) *** -(2436) ** -(423) *** -(5203) *** (308) *** (3925) *** -(4063) *** F (2638) *** (3002) *** (9538) *** -(3076) *** -(5365) *** D (3457) *** (0002) (0578) *** (2228) ** (808) * -(2974) * (3397) *** R (0585) (63) (760) *** (829) * -(648) * RL (038) (0970) (339) -(448) *** -(3262) * (958) * (95) * -(3007) *** (225) ** (722) * (8303) *** (243) ** L (420) (0675) (472) *** NL (2979) *** (2644) *** (7732) *** (864) * P (3969) *** -(398) (6286) *** (838) * (965) ** -(3732) ** (3684) *** -(250) ** E (2528) ** (7) (3832) *** (258) ** -(3408) *** -(3792) ** (3540) *** (229) ** S (869) * (2206) ** (7229) *** (2465) ** -(2593) *** UK (2377) ** (32) (9743) *** -(2392) ** -(3680) ** (3542) *** Noe: -saisics ae epoe in he paenheses, *, **, an *** san fo 0%, 5%, an % sinificance levels especively Since hee ae no aa fo R on capial income in Luxembu, he eession fo his couny is esimae base on he pe-ax capial income A = Ausia B = Belium DK = Denmak FN = Finlan F = Fance D = emany R = eece RL = elan = aly L=Luxembu NL = Nehelans P = Poual E = Spain S = Seen UK = Unie Kinom 22

24 able 3 Pice eflao: epenen vaiable lop (equaion 9) c lop m lop lo(ulc ) AR DW R 2 m - lop - lo(ulc ) - lo(+ c ) Sample A (2433) ** (375) *** (5320) *** (4952) *** B (3985) *** (672) *** (497) *** (2456) *** (3662) *** DK (2423) ** (5266) *** (4037) *** (2698) *** FN (2299) ** (572) *** (228) ** (5399) *** (2336) ** F (78) * (3580) *** (4635) *** (624) * D (4498) *** (635) * (778) *** (8452) *** R (2870) *** (6435) *** (5932) *** RL (248) ** (2872) *** (252) ** (2309) ** (2727) *** (333) (4292) *** 8934 *** (325) *** (479) *** L (480) *** (5076) *** -(3605) *** (3284) *** NL (2492) ** (4599) *** (3656) *** (2687) *** P (0982) (348) *** (3584) *** (924) *** (870) * E (97) ** (2700) *** (528) *** (2335) ** (7580) *** S (3032) *** (395) *** (5372) *** (6697) *** (2553) ** UK (0769) (206) (749) *** (29) *** (708) * Noe: -saisics ae epoe in he paenheses, *, **, an *** san fo 0%, 5%, an % sinificance levels especively A = Ausia B = Belium DK = Denmak FN = Finlan F = Fance D = emany R = eece RL = elan = aly L=Luxembu NL = Nehelans P = Poual E = Spain S = Seen UK = Unie Kinom 23

25 able 4 Expo pice eflao: epenen vaiable lop x (equaion 0) c lop m lop m - lop x - lo(ulc ) lo(ulc ) - lo(+ cf ) lop x - lo(ulc ) - lop m - lo(+ cf - ) AR DW R 2 Sample A (060) (5385) *** (3490) *** B (0674) (2633) *** (920) * DK (3965) *** (8834) *** (66) * -(4344) *** (4262) *** (3904) *** FN (08) (5279) *** (262) *** F (025) (2465) *** (3074) *** (424) *** D (2543) *** (3884) *** (38) *** (303) *** -(328) * (3683) *** (257) ** (3207) *** R (3237) *** (2355) *** (63) * -(434) *** (3536) *** (3250) *** RL (0009) (0398) *** (946) * (0240) (33334) *** (3370) *** (2886) *** (757) * -(355) *** L (2389) ** -(0006) (704) * NL (025) (877) * (823) * P (67) (5640) *** -(2640) *** (296) -(3867) *** -(6498) *** (7425) *** (937) * E (07) (9092) *** (329) (372) *** (3905) *** S (066) (626) *** (2509) *** UK (305) *** (3998) *** (2084) ** -(4725) *** (4975) *** (372) *** Noe: -saisics ae epoe in he paenheses, *, **, an *** san fo 0%, 5%, an % sinificance levels especively A = Ausia B = Belium DK = Denmak FN = Finlan F = Fance D = emany R = eece RL = elan = aly L=Luxembu NL = Nehelans P = Poual E = Spain S = Seen UK = Unie Kinom 24

26 able 5 Expos: epenen vaiable lox (equaion ) c lo(p loe AR DW R 2 x /P m ) - lo(p x /P m ) lo Sample A (283) *** -(577) *** (9008) *** B (3264) *** -(0728) (0045) *** DK (0483) -(358) *** (6445) *** FN (3074) *** -(2003) ** (645) *** (3077) *** F (78) * -(3075) *** (7689) *** (665) * (2684) *** D (45) -(876) * (5376) *** R (342) -(805) * (3968) *** RL (2223) ** -(0903) (255) ** (2608) *** (38) *** -(994) ** (8285) *** L (62) (0789) (4893) *** (2064) ** NL (268) *** -(38) (0955) *** (476) *** P (0799) (354) (440) *** (2383) ** E (085) -(224) ** (6029) *** S (3009) *** -(295) *** (7877) *** (3832) *** UK (052) -(3708) *** (4696) *** Noe: -saisics ae epoe in he paenheses, *, **, an *** san fo 0%, 5%, an % sinificance levels especively A = Ausia B = Belium DK = Denmak FN = Finlan F = Fance D = emany R = eece RL = elan = aly L=Luxembu NL = Nehelans P = Poual E = Spain S = Seen UK = Unie Kinom 25

27 able 6 mpos: epenen vaiable lom (equaion 2) c lo(p /P m ) lo(p /P m ) - lom - lo lo p- lo lo - loe lom - lo(p /P m ) - lo p- lo - AR DW R 2 p Sample A (009) (985) ** (8983) *** B (0436) (3794) *** -(2355) ** (7379) *** (2373) ** (757) * DK (239) ** (0498) (8823) *** FN (0474) (273) (2448) *** F (2486) ** (2388) ** -(3460) *** (838) *** D (699) * (0763) (9087) *** (657) * R (0067) (0553) (5743) *** (2497) ** RL (376) *** (3925) *** (3503) *** (2248) ** (835) * (2570) ** -(3265) * (3246) *** (070) (2329) ** (052) *** L (07) -(068) (6925) *** NL (064) (395) *** (82) * (9365) *** P (487) *** (3683) *** (6464) *** (2986) *** -(2598) *** -(7969) *** (3583) *** (6464) *** (6409) *** E (0096) (227) ** (8222) *** S (548) *** (206) *** (690) * -(504) *** (4262) *** (452) *** (395) *** UK (4484) *** (0826) (053) *** (457) *** -(4633) *** (4720) *** (2806) Noe: -saisics ae epoe in he paenheses, *, **, an *** san fo 0%, 5%, an % sinificance levels especively A = Ausia B = Belium DK = Denmak FN = Finlan F = Fance D = emany R = eece RL = elan = aly L=Luxembu NL = Nehelans P = Poual E = Spain S = Seen UK = Unie Kinom 26

28 able 7 he effecs of an isolae an a simulaneous %-poin fall in he pofi shae (π) Noe: A = Ausia B = Belium DK = Denmak FN = Finlan F = Fance D = emany R = eece RL = elan = aly L=Luxembu NL = Nehelans P = Poual E = Spain S = Seen UK = Unie Kinom * hane in each couny is muliplie by is shae in EU5 DP 27

29 able 8 he effecs of an isolae an a simulaneous %-poin incease in ovenmen expeniue-o-dp (κ) Noe: A = Ausia B = Belium DK = Denmak FN = Finlan F = Fance D = emany R = eece RL = elan = aly L=Luxembu NL = Nehelans P = Poual E = Spain S = Seen UK = Unie Kinom * hane in each couny is muliplie by is shae in EU5 DP 28

30 able 9 he effecs of an isolae an a simulaneous %-poin incease in R on capial income () Noe: A = Ausia B = Belium DK = Denmak FN = Finlan F = Fance D = emany R = eece RL = elan = aly L=Luxembu NL = Nehelans P = Poual E = Spain S = Seen UK = Unie Kinom * hane in each couny is muliplie by is shae in EU5 DP 29

31 able 0 he effecs of an isolae an a simulaneous %-poin ecease in R on labou income () Noe: A = Ausia B = Belium DK = Denmak FN = Finlan F = Fance D = emany R = eece RL = elan = aly L=Luxembu NL = Nehelans P = Poual E = Spain S = Seen UK = Unie Kinom * hane in each couny is muliplie by is shae in EU5 DP 30

32 able he effecs of a simulaneous chane of he policy mix in all counies Noe: A = Ausia B = Belium DK = Denmak FN = Finlan F = Fance D = emany R = eece RL = elan = aly L=Luxembu NL = Nehelans P = Poual E = Spain S = Seen UK = Unie Kinom * hane in each couny is muliplie by is shae in EU5 DP 3

33 32 Appenix A Effecs of isolae chanes in pofi shae an fiscal policy on aeae eman, pivae invesmen an pimay bue balance A Effecs of chanes in pofi shae he oal effec of a chane in pofi shae ( ) in equilibium aeae eman (AD) is iven by: NX (A) Diviin houh by : NX (A2) an (A3) (A4) NX NX NX (A5) (A6) he oal effec of on pivae invesmen/dp is calculae as: D D D D (A7) Subsiuin equaions (A3) (A7) (A5) an (A6) ino (A2) an solvin fo, e obain: D D NX NX D (A8) n Equaion (A8) he em D D NX capues he muliplie effec an has o be posiive fo sabiliy he effec of an isolae %-poin incease in on