Fiscal expenditure spillovers in the euro area: An empirical and model-based assessment

Series: Occasional Papers. 2012.

Author: Mario Alloza, Marien Ferdinandusse, Pascal Jacquinot and Katja Schmidt.

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Fiscal expenditure spillovers in the euro area: An empirical and model-based assessment (2 MB)

Abstract

The paper describes the main transmission channels of the spillovers of national fiscal
policies to other countries within the euro area and investigates their magnitude using
different models. In the context of Economic and Monetary Union (EMU), fiscal spillovers
are relevant for the accurate assessment of the cyclical outlook in euro area countries, as
well as in the debates on a coordinated change in the euro area fiscal stance and on a euro
area fiscal capacity. The paper focuses on spillovers from expenditure-based expansions by
presenting two complementary exercises. The first is an empirical investigation of spillovers
based on a new, long quarterly dataset for the largest euro area countries and on new
estimates based on annual data for a panel of 11 euro area countries. The second uses a
multi-country general equilibrium model with a rich fiscal specification and the capacity to
analyse trade spillovers. Fiscal spillovers are found to be heterogeneous but generally
positive among euro area countries. The reaction of interest rates to fiscal expansions is an
important determinant of the magnitude of spillovers.