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

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Author Info

  • 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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Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
Phone: + 358 10 831 2268
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. Marcin Kolasa, 2008. "Structural heterogeneity or asymmetric shocks? Poland and the euro area through the lens of a two-country DSGE model," National Bank of Poland Working Papers 49, National Bank of Poland, Economic Institute.
  2. Dees, S. & di Mauro, F. & Pesaran, M.H. & Smith, L.V., 2005. "Exploring the International Linkages of the Euro Area: a Global VAR Analysis," Cambridge Working Papers in Economics 0518, Faculty of Economics, University of Cambridge.
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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 2011-03, National Bank of the Republic of Macedonia.
  2. Alfred A. Haug & Tomasz Jedrzejowicz & Anna Sznajderska, 2013. "Combining Monetary and Fiscal Policy in an SVAR for a Small Open Economy," Working Papers 1313, University of Otago, Department of Economics, revised Oct 2013.
  3. Michal Franta, 2012. "Macroeconomic Effects of Fiscal Policy in the Czech Republic: Evidence Based on Various Identification Approaches in a VAR Framework," Working Papers 2012/13, Czech National Bank, Research Department.
  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. 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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