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

María Malmierca-Ordoqui; Carlos Arenas Laorga; Marta del Río Caballero; María Malmierca-Ordoqui; Carlos Arenas Laorga; Marta del Río Caballero

doi:10.3934/QFE.2025012

Quantitative Finance and Economics

2025, Volume 9, Issue 2: 355-399. doi: 10.3934/QFE.2025012

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Research article

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

Social Sciences Department, Universidad Villanueva, Calle de la Costa Brava, 2. 28034 Madrid, Spain

Received: 09 March 2025 Revised: 03 April 2025 Accepted: 03 April 2025 Published: 06 May 2025
JEL Codes: D63, E12, E62, F45

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.
- New Keynesian,
- Gini index,
- economic policy,
- euro area,
- NGEU
Citation: María Malmierca-Ordoqui, Carlos Arenas Laorga, Marta del Río Caballero. The effect of the Next Generation EU Funds on inequality: a DSGE model approach[J]. Quantitative Finance and Economics, 2025, 9(2): 355-399. doi: 10.3934/QFE.2025012

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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.

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