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The Economic Transmission of Fiscal Policy Shocks from Western to Eastern Europe

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  • Jesús Crespo Cuaresma

    ()
    (Vienna University of Economics and Business, Institute for Fiscal and Monetary Policy)

  • Markus Eller

    ()
    (Oesterreichische Nationalbank, Foreign Research Division)

  • Aaron Mehrotra

    ()
    (Bank of Finland, Institute for Economies in Transition)

Abstract

This paper studies the transmission of a foreign fiscal policy shock (assumed to be generated in Germany) to key macroeconomic variables in five Central and Eastern European economies (CEE-5). We use quarterly data from 1995 to 2009 and estimate an open economy structural vector autoregressive (SVAR) model identified by imposing reasonable restrictions on contemporaneous responses in the system. Our model is able to identify well-known episodes of fiscal policy action in the countries under review. We find that a foreign fiscal shock affects domestic fiscal variables and vice versa, which highlights the importance of cross-country coordination of fiscal policies within the EU. All the CEE-5 respond to a fiscal expansion abroad with fiscal easing at home (more strongly on the public spending than on the revenue side). We find negative cross-border fiscal spillovers for Slovenia, the Czech Republic and Slovakia, while in Poland and Hungary, output reacts positively to a fiscal expansion in Germany. For domestic fiscal shocks, which we also explore, we find Keynesian responses in Hungary and Slovakia, while non-Keynesian responses are present in the Czech Republic, Poland and Slovenia. Our results imply that “one-size-fits-all” policy recommendations would be too simplistic for the CEE-5; a deeper understanding of the reasons for cross-country differences in response to fiscal shocks is required to be able to provide adequate information to policymakers in these countries.

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Bibliographic Info

Article provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Focus on European Economic Integration.

Volume (Year): (2011)
Issue (Month): 2 ()
Pages: 44-68

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Handle: RePEc:onb:oenbfi:y:2011:i:2:b:1

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Keywords: fiscal policy; cross-border spillovers; fiscal multiplier; foreign shock; structural vector;

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References

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  1. Tomasz Koluk & Aaron Mehrotra, 2009. "The impact of Chinese monetary policy shocks on East and South-East Asia," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 17(1), pages 121-145, 01.
  2. Mehrotra, Aaron & Crespo Cuaresma, Jesús & Eller, Markus, 2011. "The Economic transmission of fiscal policy shocks from Western to Eastern Europe," BOFIT Discussion Papers 12/2011, Bank of Finland, Institute for Economies in Transition.
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Citations

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Cited by:
  1. Catherine Prettner & Klaus Prettner, 2012. " After Two Decades of Integration: How Interdependent are Eastern European Economies and the Euro Area?," Department of Economics Working Papers wuwp138, Vienna University of Economics, Department of Economics.
  2. Michal Franta, 2012. "Macroeconomic Effects of Fiscal Policy in the Czech Republic: Evidence Based on Various Identification Approaches in a VAR Framework," Working Papers, Czech National Bank, Research Department 2012/13, Czech National Bank, Research Department.
  3. Danica Unevska Andonova & Marija Petkovska, 2011. "The transmission of external shocks to the Macedonian economic activity," Working Papers, National Bank of the Republic of Macedonia 2011-03, National Bank of the Republic of Macedonia.
  4. Alfred A. Haug & Tomasz Jedrzejowicz & Anna Sznajderska, 2013. "Combining Monetary and Fiscal Policy in an SVAR for a Small Open Economy," Working Papers, University of Otago, Department of Economics 1313, University of Otago, Department of Economics, revised Oct 2013.
  5. Jesús Crespo Cuaresma & Markus Eller & Aaron Mehrotra, 2011. "The Economic Transmission of Fiscal Policy Shocks from Western to Eastern Europe," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 44-68.
  6. Prettner, Catherine & Prettner, Klaus, 2014. "How interdependent are Eastern European economies and the Euro area?," Center for European, Governance and Economic Development Research Discussion Papers 187, University of Goettingen, Department of Economics.

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