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Fiscal policies in the euro area: Revisiting the size of spillovers

Mario Alloza, Pablo Burriel () and Javier Pérez ()

Journal of Macroeconomics, 2019, vol. 61, issue C, -

Abstract: The issue of the size of fiscal spillovers in the euro area has gained prominence recently, given proposals to coordinate fiscal policies that aim at achieving an appropriate “aggregate fiscal stance”, consistent with economic and monetary policy conditions. Given the heterogeneous fiscal positions of member states, such stance would be achieved by fine-tuning policies of countries with enough fiscal space. However, such proposals have so far been based on limited empirical evidence. On the one hand, the literature based on calibrated/estimated general equilibrium models tends to find that fiscal spillovers within the euro area are small once all channels are considered (trade channel vs. monetary policy reaction, exchange rate, and risk premium). On the other hand, the available empirical studies hinge on pools of countries, given data limitations, and do not provide robust country-specific estimates.In our paper we revisit the issue at hand. To do so, first, we compile quarterly datasets of fiscal policy variables for the four major euro area economies (1980q1-2016q4), based on consistent and comparable criteria and sources. This rich dataset allows us to effectively exploit exclusion restrictions within a structural VAR framework to identify country-specific government spending shocks. We use these shocks to explore the dynamic effects of fiscal changes in one country on neighbor countries (spillovers), finding significant and economically-relevant effects. We document that these spillover effects are notably heterogeneous in euro area countries and are particularly powerful when the fiscal actions are based on public investment expansions. We find that trade is a key transmission mechanism in explaining our results.

Keywords: Fiscal policy; Fiscal spillovers; Euro area; Vector autoregressions (search for similar items in EconPapers)
JEL-codes: C32 E32 E62 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.jmacro.2019.103132

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