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How would a fiscal shock in Germany affect other European countries? Evidence from a Bayesian GVAR model with sign restrictions

Author

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  • Markus Eller

    () (Oesterreichische Nationalbank, Foreign Research Division)

  • Martin Feldkircher

    () (Oesterreichische Nationalbank, Foreign Research Division)

  • Florian Huber

    () (Vienna University of Economics and Business (WU))

Abstract

In this paper we analyze the international effects of a fiscal policy shock in Germany on other European countries. To that end we use a flexible version of a Bayesian global vector autoregression (GVAR) model and a dataset with broad country coverage comprising a wide range of macroeconomic and financial variables. Our results suggest a comparatively strong response in a majority of European economies to such a shock. In particular, we provide evidence that a deficit-financed expansionary government spending shock in Germany generates long-lasting positive cross-border output spillovers. In the case of the euro area periphery and Central, Eastern and Southeastern (CESEE) economies, these effects may be transmitted via the financial channel since financial variables such as equity prices and private sector credit significantly increase in response to the assumed fiscal shock in Germany. Upward effects on consumer prices, by contrast, are limited to core euro area countries. When looking at the effects of an expansionary tax cut shock instead of those of a spending-driven fiscal shock, we identify cross-border output spillovers of a similar magnitude but with a lower degree of persistence; in the case of CESEE economies, these results are also characterized by more estimation uncertainty. Finally, we also provide evidence for considerable cross-country heterogeneity in fiscal spillovers; for instance within CESEE, output responses to a fiscal shock in Germany are strongest in Croatia, Hungary and Slovenia.

Suggested Citation

  • Markus Eller & Martin Feldkircher & Florian Huber, 2017. "How would a fiscal shock in Germany affect other European countries? Evidence from a Bayesian GVAR model with sign restrictions," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 54-77.
  • Handle: RePEc:onb:oenbfi:y:2017:i:1:b:3
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Martin Feldkircher & Thomas Gruber & Florian Huber, 2017. "Spreading the word or reducing the term spread? Assessing spillovers from euro area monetary policy," Department of Economics Working Papers wuwp248, Vienna University of Economics and Business, Department of Economics.
    2. Sona Benecka & Ludmila Fadejeva & Martin Feldkircher, 2018. "Spillovers from Euro Area Monetary Policy: A Focus on Emerging Europe," Working Papers 2018/04, Latvijas Banka.

    More about this item

    Keywords

    transmission of external shocks; cross-border spillovers; fiscal policy; global vector autoregression; sign restrictions; Central; Eastern and Southeastern Europe; euro area; Germany;

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • 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
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • P2 - Economic Systems - - Socialist Systems and Transition Economies

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