News and surprises: Revisiting fiscal shocks in the open economy

Michail Litainas, Peter McAdam, Alberto Montagnoli and Konstantinos Mouratidis

Journal of International Money and Finance, 2026, vol. 161, issue C

Abstract: Despite extensive research on fiscal policy, evidence on the international transmission of structural fiscal shocks remains limited and inconclusive. We address three gaps. First, we confront the perfect-foresight problem by incorporating a proxy for fiscal policy news into a multi-country VAR model—to our knowledge, the first such study to use this proxy to measure cross-border transmission of US fiscal shocks in a detailed setting. Second, we estimate a Bayesian multi-country VAR that, unlike two-country approaches, fully captures higher-order spillovers. Third, we revisit the interpretation of fiscal multipliers from New Keynesian closed-economy models. We find: (i) international spillovers operate mainly through trade (expenditure switching and boosting); (ii) transmission hinges on each recipient’s growth model; (iii) higher-order spillovers substantially amplify direct spillovers; and (iv) the exchange rate puzzle reflects omitted variables and policy regime effects.

Keywords: Fiscal foresight; Exchange rate puzzle; Openness; Bayesian multi-country VAR; Spillovers (search for similar items in EconPapers)
JEL-codes: F15 F32 F41 H62 H68 (search for similar items in EconPapers)
Date: 2026
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Citations: View citations in EconPapers (1)

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Working Paper: News and Surprises: Revisiting Fiscal Shocks in the Open Economy (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:161:y:2026:i:c:s0261560625002438

DOI: 10.1016/j.jimonfin.2025.103508

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