IMF Working Papers

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

By Patrick Blagrave, Giang Ho, Ksenia Koloskova, Esteban Vesperoni

May 9, 2018

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Patrick Blagrave, Giang Ho, Ksenia Koloskova, and Esteban Vesperoni. Cross-Border Transmission of Fiscal Shocks: The Role of Monetary Conditions, (USA: International Monetary Fund, 2018) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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

Subject: Consumption, Expenditure, Financial sector policy and analysis, Interest rate floor, Monetary policy, National accounts, Revenue administration, Spillovers

Keywords: Consumption, Countercyclical monetary policy, Demand shock, Effective lower bound, External shock, Fiscal policy, GDP ratio, GDP spillover, Global, Government spending, Government spending shock, Interest rate floor, International spillovers, Monetary policy, Monetary policy condition, Monetary policy constraint, Monetary policy in the recipient country, Output response, Recipient economy, Recipient-country GDP, Spillovers, WP

Publication Details

  • Pages:

    32

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2018/103

  • Stock No:

    WPIEA2018103

  • ISBN:

    9781484353530

  • ISSN:

    1018-5941

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