Fiscal Spillovers and Trade Relations in Europe

Pub. Date
19 March, 2007
Pub. Type

This paper explores the impact of openness, as measured by import penetration, on the size and duration of fiscal multipliers and spillovers across European Union members. The analysis is embedded in a macroeconomic model, NiGEM, to capture structural differences across countries, time and policy regimes. Panel estimation with PMG and CCE techniques is used to estimate trade relations. Our analysis indicates that fiscal multipliers and spillovers depend crucially on structural assumptions about policy and the formation of expectations. Fiscal policy has limited effects on the economies of Europe, and that the case for fiscal policy coordination is weak except in the short run. The case for coordination rests on spillovers which are likely to become ever smaller as financially liberalisation continues.