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Fiscal policy in a small euro area economy
This article discusses the role of fiscal policy in a small open economy of the euro area. In the context of a general equilibrium model, results suggest that fiscal policy can play an active role in stabilising the business cycle, having effects on production and households consumption. The analysis of the impact of fiscal measures should not, however, focus exclusively on its short-run effects, ignoring the medium-run impacts of the exit strategies necessary to ensure a sustainable path of public debt. Results suggest that, if fiscal stimulus measures are implemented, these should be temporary and that the adequate time lag to return to the initial fiscal stance depends, among other factors, on the evolution of the sovereign debt risk premium.