The Economic Transmission of Fiscal Policy Shocks from Western to Eastern Europe
Jesus Crespo Cuaresma
Vienna University of Economics and Business Administration
Oesterreichische National Bank
Aaron N. Mehrotra
Bank for International Settlements (BIS)
June 15, 2011
BOFIT Discussion Paper No. 12/2011
This paper studies the transmission of a foreign fiscal policy shock (assumed to be generated in Germany) to key macroeconomic variables in five Central and Eastern European economies (CEE-5). We use quarterly data from 1995 to 2009 and estimate an open economy structural vector autoregressive (SVAR) model identified by imposing reasonable restrictions on contemporaneous responses in the system. Our model is able to identify well-known episodes of fiscal policy action in the countries under review. We find that a foreign fiscal shock affects domestic fiscal variables and vice versa, highlighting the importance of cross-country coordination of fiscal policies within the EU. All the CEE-5 respond to a fiscal expansion abroad with fiscal easing at home (more strongly on the public spending than on the revenue side). We find negative cross-border fiscal spillovers for Slovenia, the Czech Republic and Slovakia, while in Poland and Hungary, output reacts positively to a fiscal expansion in Germany. For domestic fiscal shocks, which we also explore, we find Keynesian responses in Hungary and Slovakia, while non-Keynesian responses are present in the Czech Republic, Poland and Slovenia. Our results imply that "one-size-fits-all" policy recommendations would be too simplistic for the CEE-5; a deeper understanding of the reasons for cross-country differences in response to fiscal shocks is required to be able to provide adequate information to policymakers in these countries.
Number of Pages in PDF File: 38
Keywords: fiscal policy, cross-border spillovers, fiscal multiplier, foreign shock, structural vector autoregression, Central and Eastern Europe, Germany
JEL Classification: C54, E62, H2, H5, P2working papers series
Date posted: June 22, 2011
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 0.422 seconds