Cross-Border Transmission of Fiscal Shocks: The Role of Monetary Conditions

Abstract

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The International Transmission of US Tax Shocks: A Proxy-Svar Approach

“…As also noted inBlagrave et al (2018), in a standard Mundell-Fleming-Dornbusch framework a fiscal expansion puts upward pressure on interest rates, appreciates the nominal exchange rate, and increases domestic prices.4 A set of papers investigate fiscal spillovers within the Euro area, see for instance,Beetsma et al (2008),Beetsma and Giuliodori (2011) and, more recently, IMF (2017).5 Indeed, the methodology ofMertens and Ravn (2013) builds on the precedent work byStock and Watson (2008) presented in a 2008 NBER summer school, and later applied inStock and Watson (2012).…”

“…Aside from these two papers, most of the literature on fiscal spillovers concentrates on government spending. Auerbach and Gorodnichenko (2013) estimate government spending spillovers in a panel of OECD countries; they find, in line with Blagrave et al (2018), positive effects on foreign output. Bussiere et al (2017) use a three-country specification of the Global Integrated Monetary and Fiscal (GIMF) model of the IMF to simulate different types of budget-neutral spending policies in the US; they find positive domestic and spillover effects, that can be amplified in case of a coordinated action across countries, and a trade-off between growth and distributional consequences.…”

“…First, it relates to the literature analyzing international fiscal spillovers, in particular to the very scant literature analyzing tax spillovers. The closest paper to ours are Blagrave et al (2018) and Christofzik and Elstner (2018). Blagrave et al (2018) investigates spillovers stemming from a global fiscal shock (both spending shock and tax revenue shock), aggregated across five advanced economies; by running the local projection estimates of Jorda (2005) on the GDP of each recipient economy separately, the paper finds that spillovers depend on the monetary policy response (in particular at the zero lower bound) and on the degree of economic slack in source and recipient countries.…”

“…Blagrave et al (2018) investigates spillovers stemming from a global fiscal shock (both spending shock and tax revenue shock), aggregated across five advanced economies; by running the local projection estimates of Jorda (2005) on the GDP of each recipient economy separately, the paper finds that spillovers depend on the monetary policy response (in particular at the zero lower bound) and on the degree of economic slack in source and recipient countries. Although it addresses the relevant issue of the state-dependency of fiscal policy effectiveness, Blagrave et al (2018) focus on the more endogenous variable tax revenues instead of tax rate shocks. Moreover, they do not concentrate on the transmission mechanism of fiscal shocks, which is instead our focus.…”

Fiscal Policy Shocks and International Spillovers

“…In both cases, the spillovers are not always significant but it is worth noting that in Faccini et al (2016) spillovers are largest in Canada and the UK. Blagrave et al (2018) and Auerbach and Gorodnichenko (2013b) also estimate state-dependent spillovers. 6 The former find that spillovers are significant only when recipient economies are at their effective lower bound and in the latter foreign output effects are largest during recessions.…”