The Economic Transmission of Fiscal Policy Shocks from Western to Eastern Europe

38 Pages Posted: 22 Jun 2011

See all articles by Jesús Crespo Cuaresma

Jesús Crespo Cuaresma

Vienna University of Economics and Business

Markus Eller

Oesterreichische Nationalbank (OeNB)

Aaron N. Mehrotra

Bank for International Settlements (BIS)

Date Written: June 15, 2011

Abstract

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.

Keywords: fiscal policy, cross-border spillovers, fiscal multiplier, foreign shock, structural vector autoregression, Central and Eastern Europe, Germany

JEL Classification: C54, E62, H2, H5, P2

Suggested Citation

Cuaresma, Jesus Crespo and Eller, Markus and Mehrotra, Aaron N., The Economic Transmission of Fiscal Policy Shocks from Western to Eastern Europe (June 15, 2011). BOFIT Discussion Paper No. 12/2011, Available at SSRN: https://ssrn.com/abstract=1868789 or http://dx.doi.org/10.2139/ssrn.1868789

Jesus Crespo Cuaresma

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Markus Eller (Contact Author)

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3
Vienna, A-1090
Austria
+43 1 404 20-5227 (Phone)
+43 1 404 20-045227 (Fax)

HOME PAGE: http://www.oenb.at/en/Monetary-Policy/Research/Researchers/Markus-Eller.html

Aaron N. Mehrotra

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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