Series: Working Papers. 1820.
Author: Mario Alloza, Pablo Burriel and Javier J. Pérez.
Published in: Journal of Macroeconomics Volume 61, September 2019
Full document
Abstract
The issue of the size of fiscal spillovers in the euro area has gained prominence recently, given
proposals to coordinate fiscal policies that aim at achieving an appropriate “aggregate fiscal
stance”, consistent with economic and monetary policy conditions. Given the heterogeneous
fiscal positions of member states, such stance would be achieved by fine-tuning policies of
countries with enough fiscal space. Appealing as they are, such proposals have so far been
based on limited empirical evidence. On the one hand, the literature based on calibrated/
estimated general equilibrium models tends to find that fiscal spillovers within the euro area are
small once all channels are considered (trade channel vs. monetary policy reaction, exchange
rate, and risk premium). On the other hand, the available empirical studies hinge on pools of
countries, given data limitations, and do not provide robust country-specific estimates. In our
paper we revisit the issue at hand. To do so, first, we compile quarterly datasets of fiscal policy
variables for the four major euro area economies (1980q1-2016q4), based on consistent and
comparable criteria and sources. This rich dataset allows us to effectively exploit exclusion
restrictions within a structural VAR framework to identify country-specific government spending
shocks. We use these shocks to explore the dynamic effects of fiscal changes in one country
on neighbor countries (spillovers), finding significant and economically-relevant effects. We
document that these spillover effects are notably heterogeneous in euro area countries and are
particularly powerful when the fiscal actions are based on public investment expansions. We
find that trade is a key transmission mechanism in explaining our results.