Fiscal spillovers in the Euro area

Abstract

This paper analyses the dynamic effects of fiscal imbalances in a given EMU member state on the borrowing costs of other countries in the euro area. The estimation of a multivariate, multi-country time series model (specifically a Global VAR, or GVAR) using quarterly data for the EMU period suggests that euro-denominated government yields are strongly linked with each other. However, financial markets seem to be able to discriminate among different issuers. Consequently, fiscal imbalances in Italy and in other peripheral countries should be closely monitored by their EMU partners and the European institutions.

Measuring fiscal spillovers in EMU and beyond: A Global VAR approach

“…Spillover effects may be especially substantial when sovereign debt is at a high level and the additional fiscal expansion is debt‐financed. To a certain extent, these concerns are also relevant for private debt not only because it has partly become public debt during the financial crisis (Alcidi et al ., ; Caporale and Girardi, ; European Commission, ; Thirion, ).…”

“…We differentiate between fiscal shocks in individual countries and common Euro area‐wide shocks which are called ‘regional’ shocks in the GVAR analysis. We extend our analysis to include European economies outside the Euro area in order to assess whether, on one hand, core and peripheral EMU countries and, on the other hand, EMU member countries and the ‘Rest of Europe’ react symmetrically to external fiscal shocks (Caporale and Girardi, ). Special attention will be paid to the question of whether spillovers are stronger within the EMU group than within the larger EU group due to tighter financial or trade links (Faini, ).…”

Current Account ‘Core–Periphery Dualism’ in the EMU

“…Given the small size of their economies compared with the euro area as a whole, the omission of later entrants (namely Slovenia, Cyprus, Luxembourg and Malta) should not significantly affect the results. A similar choice was made byCaporale and Girardi (2011), among others.© 2016 John Wiley & Sons Ltd 1520 R. DE SANTIS AND T. CESARONI…”

“…Following the literature(Caporale and Girardi, 2011;Caporale et al, 2015), we define Austria, Belgium, Finland, France, Germany and the Netherlands as 'core' and Greece, Ireland, Italy, Portugal and Spain as peripheral EMU countries.25 The script of all the regression is available on request.26 In this form, it is not possible to make a cross-comparison of the magnitude of the coefficients that are not elasticities as the regressors are not in logarithmic form. This is due to the fact that many indicators take negative values and cannot be transformed into logarithms.27 Arellano and Bond (1991) propose a test of the hypothesis of no second-order serial correlation in the disturbances of the first differenced equation.…”

Windfall of Low Interest Payments and Fiscal Sustainability in the Euro Area: Analysis through Panel Fiscal Reaction Functions

“…14 Negative IRGD implies that larger spending today does not require lower future spending (see, e.g., Fischer and Easterly 1990). In the case of fiscal policy, this 13 Flight-from-risk and flight-to-quality are provided as an explanation of the negative IRGD in the core countries by, e.g., Caporale and Girardi (2013). 14 In this group, only Italy, which was struggling with slow GDP growth, did not benefit from negative IRGD.…”