Jump-starting the euro area recovery : would a rise in core fiscal spending help the periphery?

We show that a .scal expansion by the core economies of the euro area would have a large and positive impact on periphery GDP assuming that policy rates remain low for a prolonged period. Under our preferred model speci.cation, an expansion of core government spending equal to one percent of euro area GDP would boost periphery GDP around 1 percent in a liquidity trap lasting three years, about half as large as the effect on core GDP. Accordingly, under a standard ad hoc loss function involving output and in.ation gaps, increasing core spending would generate substantial welfare improvements, especially in the periphery. The bene.ts are considerably smaller under a utility-based welfare measure, re.ecting in part that higher net exports play a material role in raising periphery GDP.