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Cross-Border Spillovers from Fiscal Stimulus

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  • Giancarlo Corsetti

    (European University Institute, University of Rome III and CEPR)

  • André Meier

    (International Monetary Fund)

  • Gernot J. Müller

    (University of Bonn and CEPR)

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, and 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.

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Bibliographic Info

Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 6 (2010)
Issue (Month): 1 (March)
Pages: 5-37

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Handle: RePEc:ijc:ijcjou:y:2010:q:1:a:1

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  1. Giancarlo Corsetti & André Meier & Gernot J. Müller, 2012. "Fiscal Stimulus with Spending Reversals," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 878-895, November.
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Citations

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Cited by:
  1. Hebous, Shafik & Zimmermann, Tom, 2013. "Estimating the effects of coordinated fiscal actions in the euro area," European Economic Review, Elsevier, vol. 58(C), pages 110-121.
  2. Tobias Cwik & Volker Wieland, 2011. "Keynesian government spending multipliers and spillovers in the euro area," Economic Policy, CEPR & CES & MSH, vol. 26(67), pages 493-549, 07.
  3. Fujiwara, Ippei & Ueda, Kozo, 2013. "The fiscal multiplier and spillover in a global liquidity trap," Journal of Economic Dynamics and Control, Elsevier, vol. 37(7), pages 1264-1283.
  4. Sebastian Gechert, 2013. "What fiscal policy is most effective? A Meta Regression Analysis," IMK Working Paper 117-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  5. Giancarlo Corsetti & Gernot J. Müller, 2011. "Multilateral Economic Cooperation and the International Transmission of Fiscal Policy," NBER Working Papers 17708, National Bureau of Economic Research, Inc.
  6. Shafik Hebous, 2011. "The Effects Of Discretionary Fiscal Policy On Macroeconomic Aggregates: A Reappraisal," Journal of Economic Surveys, Wiley Blackwell, vol. 25(4), pages 674-707, 09.
  7. Luca Agnello & Jacopo Cimadomo, 2012. "Discretionary Fiscal Policies over the Cycle: New Evidence Based on the ESCB Disaggregated Approach," International Journal of Central Banking, International Journal of Central Banking, vol. 8(2), pages 43-85, June.
  8. Umut Unal, 2011. "Rethinking the Effects of Fiscal Policy on Macroeconomic Aggregates: A Disaggregated SVAR Analysis," Working Papers 1109, Florida International University, Department of Economics.
  9. Wieland, Volker, 2009. "Fiscal stimulus and the promise of future spending cuts," CEPR Discussion Papers 7615, C.E.P.R. Discussion Papers.
  10. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Output Spillovers from Fiscal Policy," NBER Working Papers 18578, National Bureau of Economic Research, Inc.
  11. Faia, Ester & Lechthaler, Wolfgang & Merkl, Christian, 2013. "Fiscal stimulus and labor market policies in Europe," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 483-499.
  12. Gagnon, Marie-Hélène & Gimet, Céline, 2013. "The impacts of standard monetary and budgetary policies on liquidity and financial markets: International evidence from the credit freeze crisis," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4599-4614.

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