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Spillover effects of fiscal policy in a monetary union: Why do fiscal instruments matter?

Amélie Barbier‐Gauchard and Thierry Betti

Bulletin of Economic Research, 2021, vol. 73, issue 1, 1-33

Abstract: Using a two‐country DSGE model, we analyse the spillover effects of fiscal policy in a monetary union. Based on a non‐Walrasian labour market with a labour force participation decision and involuntary unemployment and a detailed fiscal sector, we focus on the relative cross‐border effects of different kinds of fiscal shocks (government expenditure and tax shocks). Among the major lessons from this analysis, five general and striking results are worth highlighting : (1) spillover effects differ widely according to the fiscal instrument, (2) all fiscal instruments produce positive spillover effects on foreign GDP except a rise in government consumption, (3) the response of unemployment is not always negatively correlated with the response of output (4) the different fiscal shocks trigger different effects on foreign inflation and the term of trade, which implies heterogeneous interest‐rate and trade channels, and (5) a more accommodative monetary policy and a scenario of ‘fiscal dominance’ alter greatly the effects of fiscal policy shocks.

Date: 2021
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Working Paper: Spillover effects of fiscal policy in a monetary union: Why do fiscal instruments matter ? (2020)
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