Working Paper: CEPR ID: DP5222
Authors: Roel Beetsma; Massimo Giuliodori; Franc Klaassen
Abstract: We explore the international spillovers from fiscal policy shocks via trade in Europe. A fiscal expansion stimulates domestic activity, which leads to more foreign exports and, hence, higher foreign output. To quantify this, we combine a panel VAR model in government spending, net taxes and GDP with a panel trade model. On average, a public spending increase equal to 1% of GDP implies 2.3% more foreign exports over the first two years. The corresponding figure for an equal-size net tax reduction is 0.6%. Both estimates are statistically significant. As far as the effect on foreign activity is concerned, a 1% of GDP spending increase (net tax reduction) in Germany on average raises GDP of trading partners by 0.23% (0.06%) over the first two years. These figures are likely to form lower bounds for the actual effects and suggest that it may be worthwhile to further investigate the benefits from coordinated fiscal expansions (contractions) in response to European-wide cyclical downturns (upswings)
Keywords: Coordination; European Union; Fiscal Shocks; Impulse Responses; Trade Spillovers
JEL Codes: E62; F41; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal Expansion (E62) | Domestic Activity (D13) |
| Domestic Activity (D13) | Foreign Exports (F10) |
| Fiscal Expansion (E62) | Foreign Output (F29) |
| 1% Increase in Public Spending (H59) | 2.3% Increase in Foreign Exports (F10) |
| 1% Increase in Net Tax Reduction (H23) | 0.6% Increase in Foreign Exports (F10) |
| 1% Increase in GDP from Fiscal Policy in Germany (E62) | 0.23% Increase in GDP of Trading Partners (F10) |
| 1% Increase in GDP from Tax Reductions in Germany (H32) | 0.06% Increase in GDP of Trading Partners (F10) |