Discussion Paper Details

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Title: Trade Spillovers of Fiscal Policy in the European Union: A Panel Analysis

Author(s): Roel Beetsma, Massimo Giuliodori and Franc Klaassen

Publication Date: September 2005

Keyword(s): coordination, European Union, Fiscal shocks, impulse responses and trade spillovers

Programme Area(s): International Macroeconomics

Abstract: We explore the international spillovers from fiscal policy shocks via trade in Europe. A fiscal expansion stimulates domestic activity, which leads to more foreign exports and, hence, higher foreign output. To quantify this, we combine a panel VAR model in government spending, net taxes and GDP with a panel trade model. On average, a public spending increase equal to 1% of GDP implies 2.3% more foreign exports over the first two years. The corresponding figure for an equal-size net tax reduction is 0.6%. Both estimates are statistically significant. As far as the effect on foreign activity is concerned, a 1% of GDP spending increase (net tax reduction) in Germany on average raises GDP of trading partners by 0.23% (0.06%) over the first two years. These figures are likely to form lower bounds for the actual effects and suggest that it may be worthwhile to further investigate the benefits from coordinated fiscal expansions (contractions) in response to European-wide cyclical downturns (upswings)

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Bibliographic Reference

Beetsma, R, Giuliodori, M and Klaassen, F. 2005. 'Trade Spillovers of Fiscal Policy in the European Union: A Panel Analysis'. London, Centre for Economic Policy Research.