Abstract

Positive cross-country spillovers from collective fiscal action by the world’s largest economies helped speed the recovery from the global financial crisis nearly a decade ago. But do fiscal spillovers still matter today? The answer is yes—but the extent depends on circumstances in both the countries that generate fiscal shocks and in those that are recipients of the shocks. This chapter combines new empirical research and model-based simulations to show that fiscal spillovers tend to be low when a fiscal shock originates from a country without output gaps, but the impact intensifies when a source or recipient country is in recession and/or benefiting from accommodative monetary policy—which suggests that spillovers are large when domestic multipliers are also large. The chapter also finds that spillovers from government spending shocks are larger than those associated with tax shocks, that the transmission of fiscal shocks may be stronger among countries with fixed exchange rates, and that fiscal spillovers impact the external positions of source and recipient countries alike. Model-based simulations suggest that the cross-border effects of budget-neutral fiscal reforms are generally modest, though large reforms can trigger spillovers, especially if they affect cross-border investment decisions. Overall, this evidence draws attention to the cross-border repercussions of corporate tax reform in the United States, for example, or of an increase in public investment in Germany.