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Short-Term Fiscal Spillovers in a Monetary Union

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Agnes Benassy-Quere

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Abstract

In this paper, a simple, two-country, static model is developed in order to analyze short-run fiscal spillovers in a monetary union, depending on (i) the way fiscal policy is implemented (expenditures versus net taxes), (ii) the strength of the supply-side channel of tax policies compared to the demand-side channel, and (iii) the extent of central bank accommodation. It is shown that both a spending expansion and a tax cut produce positive spillovers on foreign output provided the central bank accommodates the shock, except if tax cuts have large supply-side effects. If the central bank does not accommodate the shock, the spillovers of a fiscal expansion are generally negative. However fiscal spillovers can be positive in the case of a tax cut because induced disinflation reduces or even reverses the reaction of the central bank. Due to financial liberalization, it is possible that demand-side channels of fiscal policy have become less powerful compared to supply-side channels. To the extent that interest-rate variations are smooth, this could reduce the positive spillover of a spending expansion while turning the spillover of a tax cut into the negative territory.

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Paper provided by CEPII research center in its series Working Papers with number 2006-13.

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Date of creation: Jul 2006
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Handle: RePEc:cii:cepidt:2006-13

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Related research
Keywords: Fiscal policy; theoretical model; spillovers; monetary union; short run; tax and budget policy; models; monetary block;

Find related papers by JEL classification:
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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    Other versions:
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  5. Perotti, Roberto, 2005. "Estimating the Effects of Fiscal Policy in OECD Countries," CEPR Discussion Papers 4842, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Andrew Mountford & Harald Uhlig, 2005. "What are the Effects of Fiscal Policy Shocks?," SFB 649 Discussion Papers SFB649DP2005-039, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
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  8. Goodfriend, Marvin, 1991. "Interest rates and the conduct of monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 34(1), pages 7-30, January. [Downloadable!] (restricted)
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  9. Selma Mahfouz & Richard Hemming & Michael Kell, 2002. "The Effectiveness of Fiscal Policy in Stimulating Economic Activity--A Review of the Literature," IMF Working Papers 02/208, International Monetary Fund. [Downloadable!]
  10. Andersen, Torben M, 2002. "Fiscal Stabilization Policy in a Monetary Union with Inflation Targeting," CEPR Discussion Papers 3232, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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