Fiscal Spillovers: The Importance of Macroeconomic and Policy Conditions in Transmission
Spillover Notes, October 18, 2017
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Bibliographic details
- Authors: Patrick Blagrave, Giang Ho, Ksenia Koloskova, Esteban Vesperoni
- Published: October 18, 2017
- Series: Spillover Notes
- DOI: https://doi.org/10.5089/9781484320303.062
Overview
- Research question: Are fiscal spillovers today as large as they were during the global financial crisis, and how do they depend on economic and policy conditions?
- Focus: Cross-border impact of fiscal policy on economic activity, emphasizing factors affecting transmission such as fiscal instruments, cyclical positions, monetary policy conditions, and exchange rate regimes.
- Source countries analyzed: France, Germany, Japan, United Kingdom, United States (five major advanced economies).
- Recipient coverage: 55 advanced and emerging market economies representing 85 percent of global output.
- Types of shocks studied: government-spending shocks and tax revenue shocks during expansion and consolidation episodes.
Methods and Scope
- Comparative assessment of fiscal spillovers from the five source countries to 55 recipient countries.
- Examination of variation in transmission by:
- Fiscal instrument (government spending versus tax revenue).
- Cyclical position (presence or absence of slack).
- Monetary policy stance (accommodative versus non-accommodative).
- Exchange rate regime (fixed versus flexible arrangements).
- Timeframe and document particulars indicated in the original publication (study length: 31 pages; series and issue: Spillover Notes No 2017/002).
Key Findings
- Spillovers are economically significant in the presence of slack and/or accommodative monetary policy—and considerably smaller otherwise.
- The pattern implies that spillovers are large when domestic multipliers are also large.
- Spillovers from government-spending shocks are larger and more persistent than those from tax shocks.
- Transmission may be stronger among countries with fixed exchange rates.
- Overall assessment: Although spillovers from fiscal policies in the current environment may not be as large as they were during the crisis, they may still be important under certain economic circumstances.
Policy Implications and Recommendations
- Consider macroeconomic context when designing fiscal policy with cross-border effects:
- Recognize that fiscal expansions/contractions will have larger international effects when recipient economies face slack and when monetary policy is accommodative.
- Pay attention to the choice of fiscal instrument:
- Government-spending measures are likely to produce larger and more persistent international spillovers than tax-based measures.
- Take exchange rate regimes into account:
- Fixed exchange rate arrangements may amplify transmission of fiscal shocks across borders.
- Use findings to calibrate coordination or communication of fiscal actions in major economies, especially during periods of economic slack or accommodative monetary policy.
Fiscal Spillovers: The Importance of Macroeconomic and Policy Conditions in Transmission — Patrick Blagrave, Giang Ho, Ksenia Koloskova, Esteban Vesperoni; Spillover Notes 2017, 002.
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