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A "Beggar-Thy-Neighbor" Effect in Public Debt? Evidence from cross-border spillover of fiscal consolidations

Kodjovi Eklou, Marcelin Joanis and Patrick Richard

Cahiers de recherche from Departement d'Economique de l'École de gestion à l'Université de Sherbrooke

Abstract: In a globalized world, countries are exposed to policy shocks from abroad. This paper investigates the cross-border effect of fiscal consolidations taking place in two safe assets countries (Germany and the USA). Cross-border spillovers are defined as the results of fiscal consolidation shocks in Germany or USA which are transmitted to peripheral countries. We consider two levels of analysis: the external effect of US fiscal consolidations on other OECD countries and the external effect of German fi scal consolidations on other Eurozone countries. The "beggar-thy-neighbor" effect in this context means that a reduction of the public debt in a safe asset country as a consequence of a fiscal consolidation plan may generate an increase in the public debt abroad. Our empirical analysis in a sample of 27 OECD countries over the period 1980 - 2007 shows an evidence of a "beggar-thy-neighbor" effect in public debts. We find empirical supports for the mechanism both at the OECD and the Eurozone levels.

Keywords: Fiscal consolidation; Spillover e ffects; Bond yields; Bond issuance; OECD; Eurozone (search for similar items in EconPapers)
JEL-codes: E44 E62 F36 F42 H63 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2015-09
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