Multilateral economic cooperation and the international transmission of fiscal policy

Giancarlo Corsetti and Müller, Gernot
Authors registered in the RePEc Author Service: Gernot J. Müller

No 8748, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: During the global financial crisis 2007--2009 fiscal policy was widely used as a stabilization tool. Policymakers allowed a large build-up of public debt resulting from both automatic and discretionary expansionary measures. At the same time, calls for policy coordination stressed that international spillovers of fiscal policy might be sizeable. We reconsider the case for fiscal coordination by providing new evidence on the cross-border effects of discretionary fiscal measures. We rely on a vector autoregression model as well as on a quantitative business cycle model. We find that i) large spillover effects cannot be ruled out and, in contrast to conventional wisdom, ii) financial factors rather than trade flows lie at the heart of the international transmission mechanism. We discuss the implications of these results for policy coordination when markets price sovereign default risk, and put pressure on governments for implementing budget consolidation measures.

Keywords: Fiscal policy coordination; Government spending; Spillover effects; Financial crisis (search for similar items in EconPapers)
JEL-codes: E62 F42 (search for similar items in EconPapers)
Date: 2012-01
New Economics Papers: this item is included in nep-mac and nep-opm
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Related works:
Chapter: Multilateral Economic Cooperation and the International Transmission of Fiscal Policy (2013)
Working Paper: Multilateral Economic Cooperation and the International Transmission of Fiscal Policy (2011)
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