The effect of the Next Generation EU Funds on inequality: a DSGE model approach

Abstract

The dire economic and social consequences of COVID-19 have led the European Commission to provide an unprecedented response to the pandemic crisis through the Next Generation EU program. In order to analyze the impacts of a variety of scenarios for the allocation of these funds, we developed a two-country New Keynesian model, representing the periphery and the core of the euro area. Based on asymmetric fiscal shocks, we show how European funds can bring sustainable economic growth and decrease consumption inequality in the recipient countries while causing negative spillovers in the countries not receiving the funds. The use of the recovery instrument to carry out productive public spending projects, or the reception of the funds in the form of grants, are factors that generate more permanent effects on inequality and growth in the beneficiary country.