Expectations about increases in fiscal policy can overturn disinflationary pressures. News about fiscal policy can actually increase demand even when the central bank maintains its independence. Previous research I have conducted using different methodologies to identify news shocks about fiscal policy, with Markus Brueckner, “News Shocks in the Data: Olympic Games and Their Macroeconomic Effects,” and with Nadav Ben Zeev “Chronicle of a War Foretold: The Macroeconomic Effects of Anticipated Defense Spending Shocks”, shows exactly that! Even when we control for monetary policy, news about increases in defense spending induces significant and persistent increases in output, hours worked, inflation and the interest rate, and significant increases in investment and consumption. If one can take Trump's announcements seriously, should expect increases in inflation in the US that would be driven by news about active fiscal policy and non loss of central bank's independence.

Germany's sound fiscal position provides space for a less restrictive fiscal policy; the rise in German demand could reduce the external surplus and help to achieve a rebalancing in the EA. Kollman at al (2014) estimate that this effect is small. In my own research, I also show that fiscal consolidation, as a means to induce an internal devaluation in a two country model works, but it affects very little economic activity in the Periphery. Reversing the argument, I would expect that in the most recent two-country DSGE models of a monetary union that we use for policy analysis, fiscal expansion could also lead to internal appreciations but the effect that the latter would generate would be quantitatively small. A more effective way for correcting current account imbalances is transferring resources from Germany to the periphery. Given that this is not feasible politically, and alternative way to achieve the same outcome is by promoting foreign direct investment from Germany to the periphery of the Eurozone.