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Multilateral Economic Cooperation and the International Transmission of Fiscal Policy

In: Globalization in an Age of Crisis: Multilateral Economic Cooperation in the Twenty-First Century

  • Giancarlo Corsetti
  • Gernot J. Müller

During the global financial crisis 2007--2009 fiscal policy was widely used as a stabilization tool. Policymakers allowed a large build-up of public debt resulting from both automatic and discretionary expansionary measures. At the same time, calls for policy coordination stressed that international spillovers of fiscal policy might be sizeable. We reconsider the case for fiscal coordination by providing new evidence on the cross-border effects of discretionary fiscal measures. We rely on a vector autoregression model as well as on a quantitative business cycle model. We find that i) large spillover effects cannot be ruled out and, in contrast to conventional wisdom, ii) financial factors rather than trade flows lie at the heart of the international transmission mechanism. We discuss the implications of these results for policy coordination when markets price sovereign default risk, and put pressure on governments for implementing budget consolidation measures.

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This chapter was published in:
  • Robert C. Feenstra & Alan M. Taylor, 2013. "Globalization in an Age of Crisis: Multilateral Economic Cooperation in the Twenty-First Century," NBER Books, National Bureau of Economic Research, Inc, number feen11-1, June.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12593.
    Handle: RePEc:nbr:nberch:12593
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