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Multilateral Economic Cooperation and the International Transmission of Fiscal Policy

  • 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17708.

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Date of creation: Dec 2011
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Publication status: published as Multilateral Economic Cooperation and the International Transmission of Fiscal Policy , Giancarlo Corsetti, Gernot J. Müller. in Globalization in an Age of Crisis: Multilateral Economic Cooperation in the Twenty-First Century , Feenstra and Taylor. 2014
Handle: RePEc:nbr:nberwo:17708
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