New Delhi (ABC Live): Fiscal Spillovers Notes :Are fiscal spillovers today as large as they were during the global financial crisis? How do they depend on economic and policy conditions?
This note informs the debate on the cross-border impact of fiscal policy on economic activity, shedding light on the magnitude and the factors affecting transmission, such as the fiscal instruments used, cyclical positions, monetary policy conditions, and exchange rate regimes. The note assesses spillovers from five major advanced economies (France, Germany, Japan, United Kingdom, United States) on 55 advanced and emerging market economies that represent 85 percent of global output—looking at government spending and tax revenue shocks during expansion and consolidation episodes.
We find that fiscal spillovers are economically significant in the presence of slack and/or accommodative monetary policy and considerably smaller otherwise, which suggests that spillovers are large when domestic multipliers are also large.
We also find that spillovers from government spending shocks are larger and more persistent than those from tax shocks and that transmission may be stronger among countries with fixed exchange rates.
The evidence suggests that although spillovers from fiscal policies in the current environment may not be as large as they were during the crisis, they may still be important under certain economic circumstances.
The global financial crisis rekindled the debate on the potential of fiscal policy to affect economic activity in other economies through cross-border spillovers. During the crisis, with substantial and persistent economic slack and monetary policy at the effective lower bound in many countries, fiscal stimulus was widely advocated, not least because the expected positive spillovers would add to the effectiveness of the effort at the multilateral level. More recently, the global effects of fiscal policy have been discussed, for example, in connection with changes—either pursued or contemplated—in the macroeconomic policy mix in Japan and the United States. There is also an ongoing debate on whether European countries with excess external surpluses should raise fiscal spending, in part to support growth elsewhere. At the same time, stronger cyclical positions—and a related easing of monetary policy constraints—in many countries raise questions about whether spillovers from fiscal stimulus today would be as large as they were during the global financial crisis.
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