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Global tax policy and the synchronization of business cycles

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  • Sly, Nicholas

    () (Federal Reserve Bank of Kansas City)

  • Weber, Caroline

Abstract

Using a 30-year panel of quarterly GDP fluctuations from of a broad set of countries, we demonstrate that the signing of a bilateral tax treaty increases the comovement of treaty partners' business cycles by 1/2 a standard deviation. This effect of fiscal policy is as large as the effect of trade linkages on comovement, and stronger than the effects of several other common financial and investment linkages. We also show that bilateral tax treaties increase comovement in shocks to nations’ GDP trends, demonstrating the permanent effects of coordination on fiscal policy rules. We estimate trend and business cycle components of nations' output series using an unobserved-components model in order to measure comovement between countries, and then estimate the impact of tax treaties using generalized estimating equations.

Suggested Citation

  • Sly, Nicholas & Weber, Caroline, 2015. "Global tax policy and the synchronization of business cycles," Research Working Paper RWP 15-7, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp15-07
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    More about this item

    Keywords

    Bilateral Tax Treaties; Fiscal policy; GDP; Tax treaties;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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