## Better thy Neighbor? Cross-border Effects of Fiscal Actions

_IMF Blog, September 27, 2017_

## Source details

**Canonical URL:** [Better thy Neighbor? Cross-border Effects of Fiscal Actions](https://www.imf.org/en/blogs/articles/2017/09/27/better-thy-neighbor-cross-border-effects-of-fiscal-actions)

## Other formats

- [Markdown version](/en/blogs/articles/2017/09/27/better-thy-neighbor-cross-border-effects-of-fiscal-actions/index.md)
- [Structured JSON version](/en/blogs/articles/2017/09/27/better-thy-neighbor-cross-border-effects-of-fiscal-actions/index.json)
- [Bundle manifest](/en/blogs/articles/2017/09/27/better-thy-neighbor-cross-border-effects-of-fiscal-actions/bundle-manifest.json)

## Bibliographic details
- Authors: Patrick Blagrave, Giang Ho, Ksenia Koloskova, Esteban Vesperoni
- Published: September 27, 2017

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### Cross-border effects: overview
- Publication: Patrick Blagrave, Giang Ho, Ksenia Koloskova, Esteban Vesperoni, September 27, 2017
- In the wake of the global financial crisis, fiscal stimulus was advocated widely to help mitigate the recession because its impact on activity tends to be larger when demand falls short of supply and central banks keep interest rates low—leading to larger positive cross-border effects (spillovers) on other countries.
- Nearly a decade later, spillovers from fiscal actions still matter, but their magnitude depends on:
  - the nature of the fiscal action—spending vs. taxes; and
  - circumstances in both countries that generate fiscal shocks and those that receive them.
- The analysis summarized is drawn from Chapter 4 of the October 2017 World Economic Outlook.

### Economic conditions are key
- Empirical analysis builds on research pioneered by Auerbach and Gorodnichenko (2013) and considers a wide range of fiscal actions—both government spending and taxes, and both fiscal expansions and consolidations—across a broad sample of advanced and emerging economies.
- Main empirical finding: economic conditions matter strongly in determining the size of fiscal spillovers.
- This sensitivity to economic conditions applies to both:
  - the country taking fiscal action (domestic effects), and
  - the countries receiving spillovers (foreign effects).
- Specific quantitative example provided:
  - For a one-percent of GDP increase in the fiscal deficit in a large systemic country (like the U.S.), output in the recipient country would increase by about 0.1 percent if there is economic slack, and by about half that amount otherwise.
  - If the interest rate is exceptionally low, the increase in output could be four times stronger than in normal times.
- Mechanisms explaining why conditions matter:
  - When labor markets are tight (less economic slack), expansionary fiscal actions may crowd out private employment, muting domestic effects and reducing import-driven spillovers.
  - In recipient countries without slack, higher external demand may crowd out other domestic activity, dampening the overall impact.
  - When monetary policy is unable or unwilling to counteract demand and price effects of fiscal action, domestic effects are larger and so is demand for imports—amplifying spillovers; the same logic applies in recipient countries when monetary policy does not counteract external demand shocks.

### The fiscal instrument matters: spending vs. taxes
- Not all fiscal stimulus has the same domestic or spillover effects.
- Conceptual expectation:
  - Increase in government spending (e.g., infrastructure) boosts output directly and can raise productive capacity, prompting a stronger increase in demand for imports and larger spillovers.
  - Reducing taxes has an indirect impact on output, depending on saving and spending decisions by firms and individuals, leading to weaker spillovers.
- Empirical results:
  - A 1 percent of GDP government spending increase will have a larger effect on other countries’ output—of about 0.15 percent—compared to an equally sized decrease in taxes, which would have an impact of only about 0.05 percent.
  - Note: these figures do not differentiate spillovers depending on economic conditions.

### Implications for fiscal policy today
- The analysis informs potential cross-country effects from domestic fiscal policies.
- Examples and policy-relevant implications:
  - Fiscal stimulus in Germany through higher public investment would generate meaningful spillovers to neighboring countries in Europe where output remains below potential and interest rates are exceptionally low.
  - Spending on public investment is also likely to produce greater cross-border dividends than tax cuts.
  - Given cyclical conditions in the United States, a U.S. fiscal stimulus would likely have modest spillovers, especially if implemented through tax policy measures.

*Source: Better thy Neighbor? Cross-border Effects of Fiscal Actions (IMF blog, September 27, 2017).*

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## References

- [عربي](https://blog-montada.imf.org/?p=5569)
- [https://www.imf.org/wp-content/uploads/2017/09/BLOG-1024x600-dangling-earth-globes-WEO-Ymgerman-iStock-471699385.jpg](https://www.imf.org/wp-content/uploads/2017/09/BLOG-1024x600-dangling-earth-globes-WEO-Ymgerman-iStock-471699385.jpg)
- [October 2017 World Economic Outlook](https://www.imf.org/en/Publications/WEO/Issues/2017/09/19/world-economic-outlook-october-2017)
- [https://www.imf.org/wp-content/uploads/2017/09/ENG_Sept_26_WEO_ch4_chart_2.jpg](https://www.imf.org/wp-content/uploads/2017/09/ENG_Sept_26_WEO_ch4_chart_2.jpg)

_Source: https://www.imf.org/en/blogs/articles/2017/09/27/better-thy-neighbor-cross-border-effects-of-fiscal-actions_