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Patrick Blagrave, Giang Ho, Ksenia Koloskova, and Mr. Esteban Vesperoni
Are fiscal spillovers today as large as they were during the global financial crisis? How do they depend on economic and policy conditions? This note informs the debate on the cross-border impact of fiscal policy on economic activity, shedding light on the magnitude and the factors affecting transmission, such as the fiscal instruments used, cyclical positions, monetary policy conditions, and exchange rate regimes. The note assesses spillovers from five major advanced economies (France, Germany, Japan, United Kingdom, United States) on 55 advanced and emerging market economies that represent 85 percent of global output, looking at government-spending and tax revenue shocks during expansion and consolidation episodes. It finds that fiscal spillovers are economically significant in the presence of slack and/or accommodative monetary policy—and considerably smaller otherwise, which suggests that spillovers are large when domestic multipliers are also large. It also finds that spillovers from government-spending shocks are larger and more persistent than those from tax shocks and that transmission may be stronger among countries with fixed exchange rates. The evidence suggests that although spillovers from fiscal policies in the current environment may not be as large as they were during the crisis, they may still be important under certain economic circumstances.
Ara Stepanyan, Agustin Roitman, Gohar Minasyan, Ms. Dragana Ostojic, and Mr. Natan P. Epstein
In the face of sharply lower oil prices and geopolitical tensions and sanctions, economic activity in Russia decelerated in late 2014, resulting in negative spillovers on Commonwealth of Independent States (CIS) and, to a lesser extent, on Baltic countries. The spillovers to eastern Europe have been limited. The degree of impact is commensurate with the level of these countries’ trade, remittances, and foreign direct investment (FDI) links with Russia. So far, policy action by the affected countries has focused on mitigating the immediate consequences of spillovers.
Francisco Arizala, Mr. Matthieu Bellon, Ms. Margaux MacDonald, Mr. Montfort Mlachila, and Mustafa Yenice
After close to two decades of strong economic activity, overall growth in sub-Saharan Africa decelerated markedly in 2015–16 as the largest economies experienced negative or flat growth. Regional growth started recovering in 2017, but the question remains of how trends in the economies stuck in low gear will spill over to the countries that have maintained robust growth. This note illuminates the discussion by identifying growth spillover channels. The focus is on trade, banking, financial, remittance, investment, fiscal, and security channels, which are the most prominent and most likely to transmit growth trends across borders. In addition to bringing together findings from a broad array of existing research, the note identifies countries that are the most likely sources of regional spillovers and those that are most likely to be impacted, and provides estimates for the size of these channels. It finds that intraregional trade and remittance flows are an important channel for growth spillovers, while banking channels are less important but will remain a risk going forward. Finally, the note documents other important spillover channels through financial markets contagion, revenue-sharing arrangements in fiscal unions, commodity-pricing policies, corporate investment, and forced migration. The main takeaway is that the level of interdependence among sub-Saharan countries is higher than is generally assumed. Consequently, there is a need for additional emphasis on regional surveillance and spillover analysis, along with traditional bilateral surveillance.