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After the fiscal profligacy of the 1970s and early 1980s, in the last 25 years several OECD governments undertook large fiscal consolidations, aimed at sustainably reducing public deficits and debt. Surprisingly, or not, some of these consolidations were characterized by large increases in private demand and output. Subsequently, a large body of theoretical and empirical literature on expansionary fiscal contractions, ie non-Keynesian effects of fiscal policy, has developed. This literature has been far from consensual, not only because theoretical predictions are somehow fragile, but also because empirical evidence is, at best, contradictory. However, it seems that investment plays a crucial role in the existence of a possible negative fiscal multiplier. Against this background, this thesis studies the investmentrelated channel for non-Keynesian effects of fiscal policy, with the aim of identifying the conditions under which a fiscal consolidation may have expansionary effects on short-term output.

In this context, we develop a new-Keynesian DSGE model, which is calibrated for the Euro Area, with an expanded fiscal block that is gradually enhanced in order to simulate three alternative demand-and supply-driven transmission mechanisms of the investment channel:(i) the change in the composition of public expenditure;(ii) the relation between the level of the fiscal deficit, or debt, and the long-run interest rates; and (iii) the insertion of the fiscal consolidation in a broader economic reform, designed to increase markets’ competition.