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International Transmission of Fiscal Shocks: An Empirical Investigation

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Faik Koray ()
K. Peren Arin ()

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Abstract

This paper investigates how innovations in income taxes and government purchases originating in the U.S. affect the U.S. economy, and how these effects are transmitted to the Canadian economy. Using a semi-structural VAR model and data for both countries for the 1961:1-2004:3 period, we find that fiscal policy innovations originating in the U.S. are transmitted to the Canadian economy by international trade and capital flows through interest rate and exchange rate channels. Unanticipated shocks to U.S. government purchases have beggar thy neighbor effects on Canada. U.S. output increases and Canadian output decreases in response to a positive shock to U.S. government purchases. In response to an unanticipated increase in U.S. income taxes, U.S. output declines while U.S. and Canadian real interest rates rise. The response of Canadian output, however, is not significantly different from zero.

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Paper provided by Department of Economics, Louisiana State University in its series Departmental Working Papers with number 2006-03.

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  4. Marianne Baxter, 1995. "International Trade and Business Cycles," NBER Working Papers 5025, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Enrique G. Mendoza, 2001. "The International Macroeconomics of Taxation and the Case Against European Tax Harmonization," NBER Working Papers 8217, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Roberto Perotti, 2002. "Estimating the effects of fiscal policy in OECD countries," Working Paper Series 168, European Central Bank. [Downloadable!]
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  8. 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, vol. 117(4), pages 1329-1368, November. [Downloadable!] (restricted)
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  9. Fatás, Antonio & Mihov, Ilian, 2001. "The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence," CEPR Discussion Papers 2760, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. Buiter, Willem H, 1984. "Fiscal Policy in Open, Interdependent Economies," CEPR Discussion Papers 28, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. Branson, William H. & Rotemberg, Julio J., 1980. "International adjustment with wage rigidity," European Economic Review, Elsevier, vol. 13(3), pages 309-332, May. [Downloadable!] (restricted)
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  13. Wendy Edelberg & Martin Eichenbaum & Jonas D.M. Fisher, 1998. "Understanding the effects of a shock to government purchases," Working Paper Series WP-98-7, Federal Reserve Bank of Chicago. [Downloadable!]
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  14. Marcelo Bianconi & Stephen J. Turnovsky, 1997. "International Effects of Government Expenditure in Interdependent Economies," Canadian Journal of Economics, Canadian Economics Association, vol. 30(1), pages 57-84, February. [Downloadable!] (restricted)
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  16. Roberto Perotti, 2002. "Estimating the effects of fiscal policy in OECD countries," Economics Working Papers 015, European Network of Economic Policy Research Institutes. [Downloadable!]
  17. Roberto Perotti, 2004. "Estimating the effects of fiscal policy in OECD countries," Working Papers 276, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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  18. Giuseppe de Arcangelis & Serena Lamartina, 2003. "Identifying fiscal shocks and policy regimes in OECD countries," Working Paper Series 281, European Central Bank. [Downloadable!]
  19. Turnovsky, Stephen J & Bianconi, Marcelo, 1992. "The International Transmission of Tax Policies in a Dynamic World Economy," Review of International Economics, Blackwell Publishing, vol. 1(1), pages 49-72, November.
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  20. Maurice J. Roche, 1996. "Government Spending and the International Business Cycle," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 865-84, November. [Downloadable!] (restricted)
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