Cross-Border Transmission of Fiscal Shocks: The Role of Monetary Conditions

33 Pages Posted: 1 Aug 2018

See all articles by Patrick Blagrave

Patrick Blagrave

International Monetary Fund (IMF)

Giang Ho

International Monetary Fund (IMF)

Ksenia Koloskova

International Monetary Fund (IMF)

Esteban Vesperoni

International Monetary Fund (IMF); University of Maryland, College Park

Date Written: May 2018

Abstract

Fiscal stimulus was widely advocated during the global crisis, a period characterized by monetary policy constrained by the effective lower bound (ELB) in many countries, in part because of expected positive spillovers. Standard New Keynesian models predict the cross-border transmission of fiscal shocks is stronger when monetary policy is constrained in recipients. However, the empirical evidence is scarce. This paper bridges this gap by looking at the impact of fiscal shocks in systemic (source) economies on output and demand components in a large group of (recipient) countries, under different monetary policy conditions. Empirical results are compared to simulations with a state-of-the-art estimated open-economy New Keynesian model. Our results corroborate model predictions, finding larger spillovers when recipients are at the ELB, driven by stronger responses of investment and consumption relative to normal times.

Keywords: Fiscal policy, Monetary policy, Spillovers, External shocks, Fiscal policy; monetary policy; effective lower bound; international spillovers, effective lower bound, international spillovers, Models with Panel Data, Monetary Policy (Targets, Instruments, and Effects), General

JEL Classification: C33, E52, E62, H20

Suggested Citation

Blagrave, Patrick and Ho, Giang and Koloskova, Ksenia and Vesperoni, Esteban Rodrigo, Cross-Border Transmission of Fiscal Shocks: The Role of Monetary Conditions (May 2018). IMF Working Paper No. 18/103, Available at SSRN: https://ssrn.com/abstract=3221122

Patrick Blagrave (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Giang Ho

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Ksenia Koloskova

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Esteban Rodrigo Vesperoni

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

University of Maryland, College Park ( email )

College Park, MD 20742
United States

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