International spillovers from U.S. fiscal policy shocks

Nicar, Stephen (2014): International spillovers from U.S. fiscal policy shocks.

Abstract

I estimate the effect of U.S. government spending and tax shocks on Canada, Japan, and the U.K. for the period 1974 through 2007. Spending and tax shocks are identified using sign restrictions on the impulse responses from a vector autoregression (VAR). I find that while spillover effects of expansionary fiscal shocks are not uniform in direction or magnitude across countries, for Canada and Japan they result in economically significant GDP increases over some portion of the response horizon. For all three countries, government spending shocks generally have larger effects than net tax shocks. Altogether, the results support the idea that some countries may benefit significantly from expansionary U.S. fiscal policy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Fiscal policy, International Transmission, Spillovers, VAR models, Sign Restriction
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F42 - International Policy Coordination and Transmission

References

Arin, K., and F. Koray (2009): “Beggar thy Neighbor? The Transmission of Fiscal Shocks from the US to Canada,” Open Economies Review, 20, 425–434.

Beetsma, R., M. Giuliodori, and F. Klaassen (2006): “Trade Spill-Overs of Fiscal Policy in the European Union: A Panel Analysis,” Economic Policy, 21(48), 639–687.

Blanchard, O., and R. Perotti (2002): “An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output,” The Quarterly Journal of Economics, 117(4), 1329–1368.

Boileau, M., and M. Normandin (2008): “Do Tax Cuts Generate Twin Deficits? A Multi-Country Analysis,” Mimeo.

Canzoneri, M. B., R. E. Cumby, and B. Diba (2003): “New Views on the Transatlantic Transmission of Fiscal Policy and Macroeconomic Policy Coordination,” in Monetary and Fiscal Policies in EMU: Interactions and Coordination, ed. by M. Buti, pp. 283–311. Cambridge University Press, Cambridge.

Corsetti, G., and G. J. Muller (2006): “Twin Deficits: Squaring Theory, Evidence and Common Sense,” Economic Policy, 21(48), 597–638.

Enders, Z., G. J. Mu ̈ller, and A. Scholl (2011): “How do fiscal and technology shocks affect real exchange rates?: New evidence for the United States,” Journal of International Economics, 83(1), 53 – 69.

Fry, R., and A. Pagan (2007): “Some Issues in Using Sign Restrictions for Identifying Structural VARs,” Working Paper 14, National Centre for Econometric Research.

Fry, R., and A. Pagan (2011): “Sign Restrictions in Structural Vector Autoregressions: A Critical Review,” Journal of Economic Literature, 49(4), 938–60.

Giuliodori, M., and R. Beetsma (2005): “What are the Trade Spill-Overs from Fiscal Shocks in Europe? An Empirical Analysis,” De Economist, 153(2), 167–197.

Kim, S., and N. Roubini (2008): “Twin Deficit or Twin Divergence? Fiscal Policy, Cur- rent Account, and Real Exchange Rate in the U.S.,” Journal of International Economics, 74(2), 362 – 383.

Monacelli, T., and R. Perotti (2010): “Fiscal Policy, the Real Exchange Rate and Traded Goods,” The Economic Journal, 120(544), 437–461.

Mountford, A., and H. Uhlig (2009): “What are the Effects of Fiscal Policy Shocks?,” Journal of Applied Econometrics, 24(6), 960–992.

Ramey, V. A. (2011): “Identifying Government Spending Shocks: It’s All in the Timing,” The Quarterly Journal of Economics, 126(1), 1–50.

Ravn, M. O., S. Schmitt-Grohe, and M. Uribe (2007): “Explaining the Effects of Government Spending Shocks on Consumption and the Real Exchange Rate,” Working Paper 13328, National Bureau of Economic Research.

Sims, C. A. (1980): “Macroeconomics and Reality,” Econometrica, 48(1), 1–48.