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Cross‐country spillovers of fiscal consolidations in the euro area

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  • Tigran Poghosyan

Abstract

This paper revisits the issue of cross‐country spillovers from fiscal consolidations using an innovative empirical methodology. We find evidence in support of fiscal spillovers in ten euro area countries. Fiscal consolidation in one country not only reduces domestic output (direct effect) but also reduces the output of other member countries (indirect/spillover effect). Fiscal spillovers are larger for (a) more closely located and economically integrated countries, and (b) fiscal shocks originating from relatively larger countries. On average, 1% of gross domestic product fiscal consolidation in ten euro area countries reduces the combined output by 0.6% on impact, out of which half is driven by indirect effects from fiscal spillovers. The impact peters out and becomes insignificant over the medium term. It is largely driven by tax measures, which have a relatively stronger effect on output compared to expenditure measures. The results are robust to alternative measures of bilateral links across countries.

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  • Tigran Poghosyan, 2020. "Cross‐country spillovers of fiscal consolidations in the euro area," International Finance, Wiley Blackwell, vol. 23(1), pages 18-46, March.
    • Handle: RePEc:bla:intfin:v:23:y:2020:i:1:p:18-46
    DOI: 10.1111/infi.12349
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    Cited by:

    1. Alloza, Mario & Burriel, Pablo & Pérez, Javier J., 2019. "Fiscal policies in the euro area: Revisiting the size of spillovers," Journal of Macroeconomics, Elsevier, vol. 61(C), pages 1-1.
    2. Jérôme Creel, 2021. "Establishing a Fiscal Dialogue in Europe," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 63(3), pages 339-355, September.
    3. Gabrisch, Hubert, 2018. "A fire department for the Euro area: reflections on a fiscal risk-sharing capacity," MPRA Paper 83965, University Library of Munich, Germany.
    4. P. Butzen & S. Cheliout & N. Cordemans & E. De Prest & W. Melyn & L. Van Meensel & S. Van Parys, 2017. "Towards a new policy mix in the euro area ?," Economic Review, National Bank of Belgium, issue iii, pages 63-91, December.
    5. Gour Gobinda Goswami & Farzana Alamgir, 2018. "Does Economic Growth Spillover More from the Eastern than the Western Countries? Evidence from Bangladesh’s Four Decades of Growth Experience," South Asian Survey, , vol. 25(1-2), pages 59-83, March.
    6. Kyriakos C. Neanidis & Christos S. Savva, 2020. "Cross-Border Spillovers in Foreign Currency Credit," Economics Discussion Paper Series 2002, Economics, The University of Manchester.
    7. Kyriakos C. Neanidis & Christos S. Savva, 2018. "Regional Spillovers in Financial Dollarization," Centre for Growth and Business Cycle Research Discussion Paper Series 238, Economics, The University of Manchester.
    8. Luigi Bonatti & Andrea Fracasso, 2017. "Addressing the Core-Periphery Imbalances in Europe: Resource Misallocation and Expansionary Fiscal Policies," EconPol Working Paper 6, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.

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