spillovers

August 1, 2010

This paper studies business cycle interdependence among the industrialized countries since 1958. Using the spillover index methodology recently proposed by Diebold and Yilmaz (2009) and based on the generalized VAR framework, I develop an alternative measure of comovement of macroeconomic aggregates across countries. I have several important results. First, the spillover index fluctuates over time, increasing substantially following the post-1973 U.S. recessions. Secondly, the band within which the spillover index fluctuates follows an upward trend since the start of the globalization process in the early 1990s. Thirdly, the spillover index recorded the sharpest increase ever following the peak of the global financial crisis in September 2008, reaching a record level as of December 2008 (See http://data.economicresearchforum.org/erf/bcspill.aspx?lang=en for updates of the spillover plot). I also derive measures of directional spillovers and show that the U.S. (1980s and 2000s) and Japan (1970s and 2000s) are major transmitters of shocks to other countries. Finally, during the 2008-2009 global recession shocks mostly originated from the United States and spread to other industrialized countries.

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December 1, 2006

This paper documents time variation in domestic fiscal policy multipliers in Germany, the UK and the US, and in cross-border fiscal spillovers from Germany to the seven largest European Union economies. We propose two VAR models which incorporate three “global factors” representing developments in the world economy, and we combine them with identification of fiscal shocks à la Blanchard and Perotti (2002) and Perotti (2005), to study the effects of net tax and government spending shocks on GDP, inflation and interest rates. By recursively estimating these models on different samples of data, we find that the domestic impact of tax shocks has been positive but vanishing for Germany and the US, stably not significant for the UK. Financial markets deregulations may play an important role in that since they allow households to be less dependent on disposable income and to smooth more easily consumption. Domestic government spending multipliers are found to be positive but feeble in the short-run and close to zero or slightly negative in the medium-run, implying that private consumption and investments might be crowded out. These results suggest that, in the European Monetary Union, discretionary fiscal policy “surprises” (i.e. unexpected tax cuts and government spending expansions) cannot be used by governments as substitutes for lost national monetary instruments, since they have shown to be progressively ineffective over time. Finally, we find that fiscal expansions in Germany have had beneficial (though declining) effects for neighboring countries, especially the smaller ones. This may indicate that the trade channel of transmission of fiscal policy dominates the interest rate one.

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