Cross-border spillovers from fiscal stimulus

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

No 7535, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The global recession of 2008-09 has revived interest in the international repercussions of domestic policy choices. This paper focuses on the case of fiscal stimulus, investigating cross-border spillovers from an increase in exhaustive government spending on the basis of a two-country business cycle model. Our model allows spillovers to be affected by a range of features, including trade elasticities, the size and openness of economies, as well as financial imperfections. Beyond these well-known determinants, however, we highlight the central importance of policy frameworks, notably the medium-term debt consolidation regime. We consider the plausible case in which a temporary debt-financed increase in government spending gives rise to higher future taxes along with some reduction in spending over time. The anticipated spending reversal not only strengthens the domestic stimulus effect but also enhances positive cross-border spillovers through its impact on global long-term interest rates. Thus, our findings lend support to the notion that coordinated short-term stimulus policies are most effective when coupled with credible medium-term consolidation plans featuring at least some spending restraint.

Keywords: Debt consolidation; Fiscal policy; International spillovers; Monetary policy (search for similar items in EconPapers)
JEL-codes: E62 F42 (search for similar items in EconPapers)
Date: 2009-11
New Economics Papers: this item is included in nep-cba and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Journal Article: Cross-Border Spillovers from Fiscal Stimulus (2010)
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