Production Network and International Fiscal Spillovers

Michael Devereux, Karine Gente () and Changhua Yu

Working Papers from HAL

Abstract: This paper analyzes the impact of fiscal spending shocks in a multi-country model with international production networks. In contrast to standard results suggesting that production network linkages are unimportant for the aggregate response to macro shocks in a closed economy, we show that network structures may place a central role in the international propagation of fiscal shocks, particularly when wages are slow to adjust. The paper first develops a simple general equilibrium multi-country model and derives some analytical results on the response to fiscal spending shocks. We then apply the model to an analysis of fiscal spillovers in the Eurozone, using the calibrated sectoral network structure from the World Input Output Database (WIOD). In a version of the model with sticky wages, we find that fiscal spillovers from Germany and some other large Eurozone countries may be large, and within the range of empirical estimates. More importantly, we find that the Eurozone production network is very important for the international spillovers. In the absence of international production network linkages, spillovers would be only a third as large as predicted by the baseline model. Finally, we explore the diffusion of identified German government spending at the sectoral level, both within and across countries. We find that government expenditures have both significant upstream and downstream effects when these links are measured by the direction of sectoral production linkages.

Keywords: production network; fiscal policy; spillovers; Eurozone; terms of trade; nominal rigidities (search for similar items in EconPapers)
Date: 2019-06-21
New Economics Papers: this item is included in nep-eec, nep-mac and nep-ure
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-02179890v2
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Related works:
Journal Article: Production Networks And International Fiscal Spillovers (2023)
Working Paper: Production Networks and International Fiscal Spillovers (2023)
Working Paper: Production Networks and International Fiscal Spillovers (2022)
Working Paper: Production Networks and International Fiscal Spillovers (2022)
Working Paper: Production Networks and International Fiscal Spillovers (2020)
Working Paper: Production Network and International Fiscal Spillovers (2019)
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