Measuring fiscal spillovers in the economic and monetary union and beyond: A global vector autoregression approach

This paper identifies and measures fiscal spillovers in the European Union (EU) countries empirically, using a global vector autoregression (GVAR) model. The GVAR allows consistent modeling of international interdependencies and transmission channels across countries and the evaluation of different economic policies in counterfactual analyses. Our aim is to look at the sign and the absolute values of fiscal spillovers in a country-wise perspective and at the time profile (impulse response) of the impacts of fiscal shocks. If spillovers are sufficiently high, output can be stimulated across the monetary union. Furthermore we differentiate between fiscal shocks in individual countries and common euro area-wide shocks which are called “regional”. The underlying question is if the core and peripheral economic and monetary union (EMU) countries, on one hand, and EMU member countries and the “rest of Europe”, on the other hand, react symmetrically to external fiscal shocks, such as single-country or coordinated fiscal shocks. Therefore we will be paying special attention to the question of whether spillovers are stronger within the EMU group than within the larger EU group due to tighter financial or trade links. Our results indicate that spillovers of fiscal shocks originating in EMU countries are much larger for EMU destinations than for destinations located in the “rest of the EU”.  We find moderate spillover effects of fiscal policy shocks originating in Germany and France, but the results reveal a notable asymmetry between France and Germany.  However, there is significant variation regarding the magnitude of the spillovers among destination countries and country clusters. Furthermore, we find some evidence that spillovers generated by German or French fiscal spillovers are stronger for EMU than non-EMU countries in Europe.