Contrary to widespread empirical evidence, standard NOEM models imply that the real exchange rate appreciates following an increase in public spending. This paper introduces productive government purchases and shows that the real exchange rate can depreciate after a positive spending shock, thus reconciling the theoretical model with the empirical evidence. Under empirically consistent parameterization, the model implies a depreciation both on impact and in the transition. The transmission mechanism works through an increase in domestic private-sector productivity, spurred by government purchases, which reduce domestic real marginal costs.

This paper analyses the Italian economic stagnation in a Kaldorian framework. On the theoretical ground we propose an interpretation of the Italian economic stagnation based on the continuous reduction of aggregate demand and labour productivity. We also consider the role of the banking sector as a factor driving aggregate demand and, in turn, labour productivity. We estimate a VAR for the period 2002–2015 to analyse jointly the evolution of private consumption, real GDP, private investments, credit supply, labour compensation and productivity. Our main empirical finding is that aggregate demand and credit supply significantly affect the path of labour productivity, consistently with Kaldor–Verdoorn Law

We build a two-country New-Keynesian DSGE model of a Currency Union to study the effects of fiscal policy coordination, by evaluating the stabilization properties and welfare implications of different fiscal policy scenarios. Our main findings are that a government spending rule which targets the net exports gap rather than the domestic output gap produces more stable dynamics and that consolidating government budget constraints across countries with symmetric tax rate movements provides greater stabilization. A key role is played by the trade elasticity which determines the impact of the terms of trade on net exports. In fact, when goods are complements, the stabilization properties of coordinating fiscal policies are no longer supported. These findings point out to possible policy prescriptions for the Euro Area: to coordinate fiscal policies by reducing international demand imbalances, either by stabilizing trade flows across countries or by creating some form of Fiscal Union or both.

This paper studies how the interaction between the monetary policy regime and the degree of home bias in public consumption affects the exchange‐rate response to fiscal shocks in a generalized version of the Redux model of Obstfeld and Rogoff (). We show that the joint presence of home bias in public consumption and endogenous monetary policy overturns the result of the Redux model implying an exchange‐rate appreciation in response to an expansionary fiscal shock.

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