Cross-Border Spillovers from Fiscal Stimulus

31 Pages Posted: 17 Nov 2009

See all articles by Giancarlo Corsetti

Giancarlo Corsetti

University of Cambridge; University of Rome III - Department of Economics; Centre for Economic Policy Research (CEPR)

Andre Meier

International Monetary Fund (IMF)

Gernot J. Müller

University of Tuebingen - Department of Economics

Date Written: November 2009

Abstract

The global recession of 2008-09 has revived interest in the international repercussions of domestic policy choices. This paper focuses on the case of fiscal stimulus, investigating cross-border spillovers from an increase in exhaustive government spending on the basis of a two-country business cycle model. Our model allows spillovers to be affected by a range of features, including trade elasticities, the size and openness of economies, as well as financial imperfections. Beyond these well-known determinants, however, we highlight the central importance of policy frameworks, notably the medium-term debt consolidation regime. We consider the plausible case in which a temporary debt-financed increase in government spending gives rise to higher future taxes along with some reduction in spending over time. The anticipated spending reversal not only strengthens the domestic stimulus effect but also enhances positive cross-border spillovers through its impact on global long-term interest rates. Thus, our findings lend support to the notion that coordinated short-term stimulus policies are most effective when coupled with credible medium-term consolidation plans featuring at least some spending restraint.

Keywords: debt consolidation, Fiscal policy, international spillovers, monetary policy

JEL Classification: E62, F42

Suggested Citation

Corsetti, Giancarlo and Meier, Andre and Müller, Gernot J., Cross-Border Spillovers from Fiscal Stimulus (November 2009). CEPR Discussion Paper No. DP7535, Available at SSRN: https://ssrn.com/abstract=1507531

Giancarlo Corsetti (Contact Author)

University of Cambridge ( email )

University of Rome III - Department of Economics ( email )

via Ostiense 139
Rome, 00154
Italy
+39 06 5737 4056 (Phone)
+39 06 5737 4093 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Andre Meier

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Gernot J. Müller

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

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