Cross-Country Spillovers from Fiscal Consolidations

Abstract

JT03350189Complete document available on OLIS in its original format This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. ECO/WKP(2013)91 Unclassified English -Or. English ECO/WKP(2013)91 2 ABSTRACT/RESUMÉ Cross-country spillovers from fiscal consolidationsIn many OECD countries, government debt reached levels over recent years that call for reduction over the medium to longer term to ensure public finance sustainability. This paper investigates the international transmission of fiscal consolidation shocks via trade flows. Using a measure of exogenous fiscal shocks in export markets, fiscal consolidation spillovers are found to slow domestic growth and decrease employment. When fiscal consolidation efforts are synchronised across partner countries, fiscal policies have large spillover effects on output. Spillovers of fiscal consolidations on growth are found to be initially larger between countries belonging to currency unions, though this larger impact vanishes over the medium term. Larger spillovers of fiscal consolidation coincide with stronger shifts in bilateral trade flows in currency unions in the short term, despite smaller adjustments in relative exchange rates. Spillovers of fiscal consolidation are also found to be more detrimental to domestic growth during economic downturns in export markets. JEL classification codes: E23; E32; E62; F42.Keywords: Fiscal policy, fiscal consolidation, international spillovers, trade spillovers. ************************************** Les répercussions internationales des consolidations fiscalesDans de nombreux pays de l'OCDE, la dette publique a récemment atteint des niveaux appelant sa réduction sur le moyen à long terme afin d'assurer la soutenabilité des finances publiques. Ce document étudie la transmission entre pays des chocs de politique fiscale par les flux commerciaux. Les politiques d'assainissement budgétaire dans les marchés d'exports apparaissent réduire la croissance domestique et l'emploi, lorsqu'une mesure exogène des politiques fiscales est utilisée. Si les efforts d'assainissement budgétaire sont synchronisés dans les pays partenaires, ceux-ci peuvent avoir des effets importants sur la croissance. Les répercussions des consolidations fiscales apparaissent initialement plus élevées entre les pays qui partagent la même monnaie, mais cet effet additionnel s'estompe sur le moyen terme. Les plus forts mouvements des flux commerciaux au sein des unions monétaires contribuent à ces effets externes plus importants à court terme bien que les ajustements des taux de changes réels soient plus faibles. Les consolidations fiscales dans les marchés d'exports apparaissent également avoir des répercussions plus importantes sur la croissance domestique lorsque les marchés d'exports sont en récession.Codes JEL : E23 ; E32 ; E62 ; F42.Mots clés : Politique fiscale, assainissement budgétaire, effets e...

Making public finances more growth and equity-friendly in the euro area

“…For highly indebted countries, these fiscal adjustments can be very large, far exceeding preventive arm requirements. Italy, for instance, would have needed a cumulative structural effort of around 3 per cent of GDP over 2013, broadly similar to the post-crisis effort (Figure 3), which would have threatened the recovery.…”

“…Although estimates of the magnitude of spillovers vary across studies, fiscal consolidation in one country can have a sizeable negative growth impact on others, especially in bad times (Goujard, 2013;Carnot and Castro, 2015). As a result, the simultaneous fiscal adjustment across the euro area, including in core countries, is considered to have made the recession deeper and longer (Baldwin et al, 2015).…”

“…Consolidation should have been done more vigorously in the years before the global financial crisis (Eyraud and Wu, 2015), when the euro area aggregate fiscal stance was essentially neutral (Figure 8;Carnot and Castro, 2015). In bad times, national fiscal policies should take account of cross-country spillovers (Goujard, 2013) and, within SGP rules, contribute to supporting euro area aggregate demand. Euro area member countries that are also members of the OECD (15 countries).…”

Migration

“…Auerbach and Gorodnichenko, 2012). In addition, growth tends to fall more markedly if consolidation efforts get underway simultaneously across several countries as they create negative "spillover" effects via international trade channels (Goujard, 2013).…”

Society at a Glance 2014 (Summary in Slovak)

“…Auerbach and Gorodnichenko, 2012). In addition, growth tends to fall more markedly if consolidation efforts get underway simultaneously across several countries as they create negative "spillover" effects via international trade channels (Goujard, 2013).…”