Fiscal policy shocks and international spillovers

Ayobami Ilori, Juan Paez-Farrell and Christoph Thoenissen

European Economic Review, 2022, vol. 141, issue C

Abstract: The domestic and international transmission mechanism of fiscal policy shocks are analysed in the United States and in Germany. Using a Bayesian VAR approach, we find that in both of these countries a fiscal expansion is associated with increases in output as well as in private consumption and investment. The terms of trade, which affect the international transmission of fiscal policy shocks, depreciate in response to a fiscal expansion, thus transferring some of the increased domestic purchasing power abroad. A US government spending shock is expansionary for all non-US G7 members. A German government spending shock is expansionary for most, but not all European economies, both within and outside the euro area. The dynamics of the BVAR can be rationalised using a dynamic stochastic general equilibrium model where heterogeneous households and firms face borrowing constraints.

Keywords: Fiscal policy; Bayesian VAR; DSGE modelling; International business cycles; Spillovers (search for similar items in EconPapers)
JEL-codes: E62 F41 F42 (search for similar items in EconPapers)
Date: 2022
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Related works:
Working Paper: Fiscal policy shocks and international spillovers (2020)
Working Paper: Fiscal policy shocks and international spillovers (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:141:y:2022:i:c:s001429212100252x

DOI: 10.1016/j.euroecorev.2021.103969

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