Cross-country fiscal policy spillovers and capital-skill complementarity in integrated capital markets

Davoine, ThomasORCID: https://orcid.org/0000-0002-5941-0798 and Molnar, Matthias (2020) Cross-country fiscal policy spillovers and capital-skill complementarity in integrated capital markets. Economic Modelling, 88, pp. 132-150.

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Abstract or Table of Contents

The 2010 European sovereign debt crisis has renewed discussions on fiscal policy coordination. One rationale for coordination is fiscal policy cross-country spillovers. A common finding in the literature is that spillovers tend to be small in normal circumstances but can be large if monetary policy is at the zero lower bound. Orthogonal to the existing literature, we document a novel channel that generates cross-country spillovers over the medium run. We assume perfect capital markets integration and find that capital-skill complementarity can lead to large spillovers without the zero lower bound nor a large import share in government expenditures. As capital markets have become increasingly integrated in the Eurozone, the current degree of fiscal policy coordination between its members, low, may be insufficient. We also find that the smoothing benefits from a temporary rise in public debt spill over to other countries.

Item Type: Article in Academic Journal
Keywords: Cross-country spillovers, Fiscal policy coordination, Capital-skill complementarity, Computable general equilibrium
Funders: EU Horizon 2020
Classification Codes (e.g. JEL): C68, E62, F21, F42
Research Units: European Governance and Public Finance
Status: Published
Date Deposited: 15 Apr 2020 13:05
Last Modified: 15 Apr 2020 13:05
Identification Number or DOI: 10.1016/j.econmod.2019.09.014
ISSN: 0264-9993
URI: https://irihs.ihs.ac.at/id/eprint/5288

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