Multilateral Economic Cooperation and the International Transmission of Fiscal Policy

42 Pages Posted: 20 Jan 2012

See all articles by Giancarlo Corsetti

Giancarlo Corsetti

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

Gernot J. Müller

University of Tuebingen - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: January 2012

Abstract

During the global financial crisis 2007-2009 fiscal policy was widely used as a stabilization tool. Policymakers allowed a large build-up of public debt resulting from both automatic and discretionary expansionary measures. At the same time, calls for policy coordination stressed that international spillovers of fiscal policy might be sizeable. We reconsider the case for fiscal coordination by providing new evidence on the cross-border effects of discretionary fiscal measures. We rely on a vector autoregression model as well as on a quantitative business cycle model. We find that i) large spillover effects cannot be ruled out and, in contrast to conventional wisdom, ii) financial factors rather than trade flows lie at the heart of the international transmission mechanism. We discuss the implications of these results for policy coordination when markets price sovereign default risk, and put pressure on governments for implementing budget consolidation measures.

Keywords: Financial Crisis, Fiscal Policy Coordination, Government spending, Spillover effects

JEL Classification: E62, F42

Suggested Citation

Corsetti, Giancarlo and Müller, Gernot J., Multilateral Economic Cooperation and the International Transmission of Fiscal Policy (January 2012). CEPR Discussion Paper No. DP8748, Available at SSRN: https://ssrn.com/abstract=1988680

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

Gernot J. Müller

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

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