Working Paper: NBER ID: w28149
Authors: Michael B. Devereux; Karine Gente; Changhua Yu
Abstract: This paper analyzes the impact of fiscal spending shocks in a dynamic, multi-country model with international production networks. We first derive a decomposition of the effects of a fiscal spending shock on the GDP of any country. This decomposition defines the response as the sum of a Direct, Income, and Price effect. The Direct Effect depends only on structural parameters and is independent of assumptions about monetary policy, wage setting, or capital mobility, while the Price Effect is zero in the aggregate across countries. We apply this decomposition to an analysis of fiscal spillovers in the Eurozone, using the production network structure from the World Input Output Database (WIOD). We find that fiscal spillovers from Germany and some other large Eurozone countries may be large, and within the range of empirical estimates. Without international production network linkages, spillovers would be only a third as large as predicted by the baseline model. Finally, we explore the diffusion of identified government spending shocks at the sectoral level, both within and across countries, using an empirical measure of the response, based on the theoretical decomposition. The empirical estimates are strongly consistent with the theoretical model.
Keywords: fiscal spillovers; production networks; GDP response; multicountry model
JEL Codes: E23; E62; F20; F42; H50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal spending shocks (E62) | Income effect (D12) |
| Fiscal spending shocks (E62) | Price effect (D41) |
| Price effect (D41) | Aggregate price effect (E30) |
| Fiscal spending shocks (E62) | GDP (E20) |
| Fiscal spending shocks (E62) | Demand for outputs (J23) |
| International production network (L23) | Fiscal spillovers (E62) |