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The Economic transmission of fiscal policy shocks from Western to Eastern Europe

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  • Mehrotra, Aaron

    ()
    (BOFIT)

  • Crespo Cuaresma, Jesús

    (BOFIT)

  • Eller, Markus

    (BOFIT)

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, highlighting 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

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 12/2011.

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Length: 34 pages
Date of creation: 21 Jun 2011
Date of revision:
Handle: RePEc:hhs:bofitp:2011_012

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Fax: + 358 10 831 2294
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Keywords: fiscal policy; cross-border spillovers; fiscal multiplier; foreign shock; structural vector autoregression; Central and Eastern Europe; Germany;

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References

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  1. Giordano, Raffaela & Momigliano, Sandro & Neri, Stefano & Perotti, Roberto, 2007. "The effects of fiscal policy in Italy: Evidence from a VAR model," European Journal of Political Economy, Elsevier, vol. 23(3), pages 707-733, September.
  2. Roel Beetsma & Massimo Giuliodori & Franc Klaassen, 2005. "Trade Spillovers of Fiscal Policy in the European Union: A Panel Analysis," DNB Working Papers, Netherlands Central Bank, Research Department 052, Netherlands Central Bank, Research Department.
  3. Kolasa, Marcin, 2008. "Structural heterogeneity or asymmetric shocks? Poland and the euro area through the lens of a two-country DSGE model," MPRA Paper 8750, University Library of Munich, Germany.
  4. Mirdala, Rajmund, 2009. "Effects of Fiscal Policy Shocks in the European Transition Economies," MPRA Paper 19481, University Library of Munich, Germany.
  5. Stephane Dees & Filippo di Mauro & M. Hashem Pesaran & L. Vanessa Smith, 2004. "Exploring the International Linkages of the Euro Area: A Global VAR Analysis," IEPR Working Papers, Institute of Economic Policy Research (IEPR) 04.6, Institute of Economic Policy Research (IEPR).
  6. Roberto Perotti, 2004. "Estimating the effects of fiscal policy in OECD countries," Working Papers 276, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  7. Magda Kandil & Hanan Morsy, 2014. "Fiscal Stimulus and Credibility in Emerging Countries," Eastern Economic Journal, Palgrave Macmillan, vol. 40(3), pages 420-439, June.
  8. António Afonso & Ricardo M. Sousa, 2008. "The Macroeconomic Effects of Fiscal Policy," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2008/56, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  9. Mardi Dungey & Renee Fry, 2007. "The Identification Of Fiscal And Monetary Policy In A Structural Var," CAMA Working Papers 2007-29, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  10. Benkwitz, Alexander & Lütkepohl, Helmut & Wolters, Jürgen, 1999. "Comparison of Bootstrap Confidence Intervals for Impulse Responses of German Monetary Systems," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2208, C.E.P.R. Discussion Papers.
  11. Caldara, Dario & Kamps, Christophe, 2008. "What are the effects of fiscal policy shocks? A VAR-based comparative analysis," Working Paper Series, European Central Bank 0877, European Central Bank.
  12. 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.
  13. Rzonca, Andrzej & Cizkowicz, Piotr, 2005. "Non-Keynesian effects of fiscal contraction in new member states," Working Paper Series, European Central Bank 0519, European Central Bank.
  14. Ágnes Horváth & Zoltán M. Jakab & Gábor P. Kiss & Balázs Párkányi, 2006. "Myths and Maths: Macroeconomic Effects of Fiscal Adjustments in Hungary," MNB Occasional Papers, Magyar Nemzeti Bank (the central bank of Hungary) 2006/52, Magyar Nemzeti Bank (the central bank of Hungary).
  15. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(4), pages 1329-1368, November.
  16. Ricardo M. Sousa & António Afonso, 2009. "The Macroeconomic Effects of Fiscal Policy in Portugal: a Bayesian SVAR Analysis," NIPE Working Papers, NIPE - Universidade do Minho 3/2009, NIPE - Universidade do Minho.
  17. de Castro, Francisco & Hernández de Cos, Pablo, 2008. "The economic effects of fiscal policy: The case of Spain," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(3), pages 1005-1028, September.
  18. Ren�e Fry & Adrian Pagan, 2011. "Sign Restrictions in Structural Vector Autoregressions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 938-60, December.
  19. David S. Johnson & Jonathan A. Parker & Nicholas S. Souleles, 2004. "Household Expenditure and the Income Tax Rebates of 2001," NBER Working Papers 10784, National Bureau of Economic Research, Inc.
  20. Ponomarenko, Alexey A. & Vlasov, Sergey A., 2010. "Russian fiscal policy during the financial crisis," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 12/2010, Bank of Finland, Institute for Economies in Transition.
  21. Mehrotra, Aaron & Crespo Cuaresma, Jesús & Eller, Markus, 2011. "The Economic transmission of fiscal policy shocks from Western to Eastern Europe," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 12/2011, Bank of Finland, Institute for Economies in Transition.
  22. Gabriele Giudice & Alessandro Turrini & Jan in’t Veld, 2007. "Non-Keynesian Fiscal Adjustments? A Close Look at Expansionary Fiscal Consolidations in the EU," Open Economies Review, Springer, Springer, vol. 18(5), pages 613-630, November.
  23. Markus Eller, 2009. "Fiscal Position and Size of Automatic Stabilizers in the CESEE EU Member States – Implications for Discretionary Measures," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 78-84.
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Citations

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Cited by:
  1. 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.
  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. 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.
  4. 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.
  5. Alfred A.Haug & Tomasz Jędrzejowicz & Anna Sznajderska, 2013. "Combining monetary and fiscal policy in an SVAR for a small open economy," National Bank of Poland Working Papers 168, National Bank of Poland, Economic Institute.
  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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