Cross-Country Spillovers of Fiscal Consolidations in the Euro Area

June 28, 2017

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Tigran Poghosyan. Cross-Country Spillovers of Fiscal Consolidations in the Euro Area, (USA: International Monetary Fund, 2017) accessed October 6, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper revisits the issue of cross-country spillovers from fiscal consolidations using an innovative empirical methodology. We find evidence in support of fiscal spillovers in 10 euro area countries. Fiscal consolidation in one country not only reduces domestic output (direct effect), but also the output of other member countries (indirect/spillover effect). Fiscal spillovers are larger for: (i) more closely located and economically integrated countries, and (ii) fiscal shocks originating from relatively larger countries. On average, 1 percent of GDP fiscal consolidation in 10 euro area countries reduces the combined output by 0.6 percent on impact, out of which half is driven by indirect effects from fiscal spillovers. The impact peters out and becomes insignificant over the medium-term. It is largely driven by tax measures, which have a relatively stronger effect on output compared to expenditure measures. The results are robust to alternative measures of bilateral links across countries.

Subject: Economic integration, Expenditure, Financial sector policy and analysis, Fiscal consolidation, Fiscal multipliers, Fiscal policy, Fiscal stance, Monetary unions, Spillovers

Keywords: Area country, Area GDP, Baseline estimation result, Country regression, Descriptive statistics, Estimation result, Euro area GDP, Fiscal consolidation, Fiscal shock, Fiscal spillovers, Fiscal stance, GDP fiscal consolidation, Global, Local projection method, Monetary unions, Originating country, Output gap, Recipient country, Spatial econometrics, Spillovers, Tax consolidation, Weighting matrix, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/140
Stock No:

WPIEA2017140
ISBN:

9781484304372
ISSN:

1018-5941

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