Estimating the Effects of Coordinated Fiscal Actions in the Euro Area

Abstract

We estimate spillover effects of a fiscal shock in one member country in the euro area on outputs of the rest of the members, using a Global Vector Autoregression (GVAR) model. We compare the effects of a domestic fiscal shock with those of a similar size area-wide shock expressed as a weighted average of the fiscal shocks across all member countries. According to our estimates, the impact of an area-wide fiscal shock on output of a member country tends to be positive and larger than that of a domestic shock. Since the cost of participating in the area-wide shock is lower than the cost of a similar size domestic shock, our finding indicates the importance of coordinated fiscal actions in the euro area.

Keywords: fiscal policy coordination, cross-border spillovers, open economy macroeconomics, European integration, Global VAR

JEL Classification: E620, F410, F420, F150, H500, H600