Fiscal Policy Spillovers in the Euro Area: Where are they? CEPS Working Document No. 176, November 2001

Gros, Daniel and Hobza, Alexandr. (2001) Fiscal Policy Spillovers in the Euro Area: Where are they? CEPS Working Document No. 176, November 2001. [Working Paper]

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Abstract

What impact would a fiscal expansion in Germany have on the rest of the euro area? It has been generally suggested that it could go in either of two opposite directions, depending on the relative strength of two effects: the direct trade linkage and the financial market repercussions. A review of the results from four major macroeconomic models shows that the cross-country spillover effects of fiscal policy are indeed of uncertain sign and magnitude. Different models give quite different results if used in standardised simulations in terms of the sign, magnitude and time profile of the impact of a fiscal expansion in one member country (e.g. Germany) on other euro area countries. Fewer results are available concerning the potential spillover effects of structural policies, but they are similar to the ones concerning a budgetary stimulus: the magnitude of the spillover is small and varies across countries and over time.

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