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Global tax policy and the synchronization of business cycles

Nicholas Sly and Caroline Weber

No RWP 15-7, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: Using a 30-year panel of quarterly GDP ?uctuations from of a broad set of countries, we demonstrate that the signing of a bilateral tax treaty increases the comovement of treaty partners' business cycles by 1/2 a standard deviation. This e?ect of ?scal policy is as large as the e?ect of trade linkages on comovement, and stronger than the e?ects of several other common ?nancial and investment linkages. We also show that bilateral tax treaties increase comovement in shocks to nations? GDP trends, demonstrating the permanent e?ects of coordination on ?scal policy rules. We estimate trend and business cycle components of nations' output series using an unobserved-components model in order to measure comovement between countries, and then estimate the impact of tax treaties using generalized estimating equations.

Keywords: Fiscal policy; Bilateral Tax Treaties; Tax treaties; GDP (search for similar items in EconPapers)
JEL-codes: H32 H87 F42 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pub
Date: 2015-08-01, Revised 2015-08-01
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