Trade Spill-Overs of Fiscal Policy in the European Union: A Panel Analysis

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).

[1]  Gernot Müller.  Understanding the dynamic effects of government spending on foreign trade , 2008 .

[2]  Soyoung Kim,et al.  Twin Deficit or Twin Divergence? Fiscal Policy, Current Account, and Real Exchange Rate in the US , 2008 .

[3]  Gernot Müller,et al.  Twin Deficits: Squaring Theory, Evidence and Common Sense , 2006 .

[4]  Marcus J. Chambers,et al.  Granger Causality and the Sampling of Economic Processes , 2006 .

[5]  R. Barrell,et al.  World Trade and Global Integration in Production Processes: A Re-Assessment of Import Demand Equations , 2005, SSRN Electronic Journal.

[6]  R. Beetsma,et al.  What are the Trade Spill-Overs from Fiscal Shocks in Europe? An Empirical Analysis*** , 2005 .

[7]  T. Andersen.  Is There a Role for an Active Fiscal Stabilization Policy? , 2005, SSRN Electronic Journal.

[8]  Ekaterini Panopoulou,et al.  A Comparison of Autoregressive Distributed Lag and Dynamic Ols Cointegration Estimators in the Case of a Serially Correlated Cointegration Error , 2004 .

[9]  R. Faini.  Fiscal Policy and Interest Rates in Europe , 2004 .

[10]  David Lopez-Salido,et al.  Understanding the Effects of Government Spending on Consumption , 2004, SSRN Electronic Journal.

[11]  F. Klaassen,et al.  The Euro Effect on Trade is Not as Large as Commonly Thought , 2003 .

[12]  N. Gobbin,et al.  Monetary and Fiscal Policy Transmission in the Euro-area: evidence from a structural VAR analysis , 2003 .

[13]  P. Lane,et al.  The Importance of Composition of Fiscal Policy: Evidence from Different Exchange Rate Regimes , 2003 .

[14]  Ernesto H. Stein,et al.  The Currency Union Effect on Trade: Early Evidence from Emu , 2003 .

[15]  F. Canova,et al.  Price Dispersions in Monetary Unions: The Role of Fiscal Shocks , 2003 .

[16]  Carmine Trecroci,et al.  Monetary and Fiscal Policy Interactions Over the Cycle: Some Empirical Evidence , 2002, SSRN Electronic Journal.

[17]  Richard Hemming,et al.  The Effectiveness of Fiscal Policy in Stimulating Economic Activity: A Review of the Literature , 2002, SSRN Electronic Journal.

[18]  R. Barro,et al.  Economic Effects of Currency Unions , 2002 .

[19]  M. Marcellino,et al.  Some Stylized Facts on Non-Systematic Fiscal Policy in the Euro Area , 2002 .

[20]  Roberto Perotti.  Estimating the Effects of Fiscal Policy in OECD Countries , 2002, SSRN Electronic Journal.

[21]  R. Barrell,et al.  European Integration and Manufactures Import Demand: An Empirical Investigation of Ten European Countries , 2002 .

[22]  Carlo A. Favero.  How Do European Monetary and Fiscal Authorities Behave? , 2002 .

[23]  Harald Uhlig,et al.  What are the Effects of Fiscal Policy Shocks? , 2002 .

[24]  D. Gros,et al.  Fiscal Policy Spillovers in the Euro Area: Where are they? CEPS Working Document No. 176, November 2001 , 2001 .

[25]  T. Persson.  Currency unions and trade: how large is the treatment effect? , 2001 .

[26]  A. Rose.  Currency unions and trade: the effect is large , 2001 .

[27]  Volker Wieland,et al.  The Performance of Forecast-Based Monetary Policy Rules Under Model Uncertainty , 2001, SSRN Electronic Journal.

[28]  A. Rose,et al.  Does a Currency Union Affect Trade? The Time Series Evidence , 2001 .

[29]  Andrew K. Rose,et al.  National Money as a Barrier to International Trade: The Real Case for Currency Union , 2001 .

[30]  Ilian Mihov,et al.  The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence , 2001 .

[31]  A. Rose,et al.  An Estimate of the Effect of Common Currencies on Trade and Income , 2001 .

[32]  A. Rose,et al.  One money, one market : the effect of common currencies on trade , 2000 .

[33]  P. Noord.  The Size and Role of Automatic Fiscal Stabilizers in the 1990s and Beyond , 2000 .

[34]  Jonas D. M. Fisher,et al.  Assessing the Effects of Fiscal Shocks , 2000 .

[35]  Roberto Perotti,et al.  Fiscal Policy in Good Times and Bad , 1999 .

[36]  P. Pedroni.  Current Version : July 25 , 1999 CRITICAL VALUES FOR COINTEGRATION TESTS IN HETEROGENEOUS PANELS WITH MULTIPLE REGRESSORS * , 1999 .

[37]  A. Alesina,et al.  Fiscal Policy, Profits, and Investment , 1999 .

[38]  Joseph R. Prendergast,et al.  Fiscal Stance and the Real Exchange: Some Empirical Estimates , 1999 .

[39]  P. Lane,et al.  The trade balance and fiscal policy in the OECD , 1998 .

[40]  F. Caselli,et al.  Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries , 1998, SSRN Electronic Journal.

[41]  D. Salvatore,et al.  Macroeconomic Policy in Open Economies , 1997 .

[42]  V. Wieland.  Monetary policy targets and the stabilization objective: a source of tension in the EMS , 1996 .

[43]  John B. Taylor.  Macroeconomic Policy in a World Economy: From Econometric Design to Practical Operation , 1994 .

[44]  M. Pagano,et al.  Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries , 1990, NBER Macroeconomics Annual.

[45]  J. Bergstrand.  The Generalized Gravity Equation, Monopolistic Competition, and the Factor-Proportions Theory in International Trade , 1989 .

[46]  L. Taub,et al.  THE ECONOMIC OUTLOOK , 1981 .

[47]  aurice un,et al.  The Euro Effect on Trade is Not as Large as Commonly Thought , 2007 .

[48]  P. Claeys.  Fiscal and monetary policy interaction : an empirical analysis , 2006 .

[49]  A. Rose,et al.  Fiscal Divergence and Business Cycle Synchronization : Irresponsibility is Idiosyncratic , 2005 .

[50]  P. Claeys.  Monetary and budgetary policy interaction: an SVAR analysis of stabilisation policies in monetary union , 2004 .

[51]  R. Beetsma,et al.  Fiscal Policies, Monetary Policies and Labour Markets: Key Aspects of European Macroeconomic Policymaking after Monetary Unification , 2004 .

[52]  R. Cumby,et al.  New Views on the Transatlantic Transmission of Fiscal Policy and Macroeconomic Policy Coordination , 2002 .

[53]  John B. Taylor.  Monetary Policy Rules , 1999 .

[54]  R. King,et al.  Fiscal Policy in General Equilibrium , 1990 .

[55]  Pierre Jacquet.  Economic policy co-ordination in the Eurozone : what has been achieved ? What should be done ? , 2022 .