BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 12/2011:
The Economic transmission of fiscal policy shocks from Western to Eastern Europe
Aaron Mehrotra ()
, Jesús Crespo Cuaresma and Markus Eller
Abstract: This paper studies the transmission of a foreign fiscal
policy shock (assumed to be generated in Germany) to key macroeconomic
variables in five Central and Eastern European economies (CEE-5). We use
quarterly data from 1995 to 2009 and estimate an open economy structural
vector autoregressive (SVAR) model identified by imposing reasonable
restrictions on contemporaneous responses in the system. Our model is able
to identify well-known episodes of fiscal policy action in the countries
under review. We find that a foreign fiscal shock affects domestic fiscal
variables and vice versa, highlighting the importance of cross-country
coordination of fiscal policies within the EU. All the CEE-5 respond to a
fiscal expansion abroad with fiscal easing at home (more strongly on the
public spending than on the revenue side). We find negative cross-border
fiscal spillovers for Slovenia, the Czech Republic and Slovakia, while in
Poland and Hungary, output reacts positively to a fiscal expansion in
Germany. For domestic fiscal shocks, which we also explore, we find
Keynesian responses in Hungary and Slovakia, while non-Keynesian responses
are present in the Czech Republic, Poland and Slovenia. Our results imply
that “one-size-fits-all” policy recommendations would be too simplistic for
the CEE-5; a deeper understanding of the reasons for cross-country
differences in response to fiscal shocks is required to be able to provide
adequate information to policymakers in these countries.
Keywords: fiscal policy; cross-border spillovers; fiscal multiplier; foreign shock; structural vector autoregression; Central and Eastern Europe; Germany; (follow links to similar papers)
JEL-Codes: C50; E62; H20; H50; P20; (follow links to similar papers)
34 pages, June 21, 2011
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