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N° 2006-13 |
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| July 2006 |
| Short-Term Fiscal Spillovers in a Monetary Union |
| Agnès Bénassy-Quéré |
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| In this paper, a simple, two-country, static model is developed in order to analyze short-run
fiscal spillovers in a monetary union, depending on (i) the way fiscal policy is implemented
(expenditures versus net taxes), (ii) the strength of the supply-side channel of tax policies compared to the demand-side channel, and (iii) the extent of central bank accommodation.
It is shown that both a spending expansion and a tax cut produce positive spillovers on
foreign output provided the central bank accommodates the shock, except if tax cuts have
large supply-side effects. If the central bank does not accommodate the shock, the spillovers
of a fiscal expansion are generally negative. However fiscal spillovers can be positive in the
case of a tax cut because induced disinflation reduces or even reverses the reaction of the
central bank. Due to financial liberalization, it is possible that demand-side channels of
fiscal policy have become less powerful compared to supply-side channels. To the extent
that interest-rate variations are smooth, this could reduce the positive spillover of a spending
expansion while turning the spillover of a tax cut into the negative territory. |
Abstract |
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| Fiscal policy; theoretical model; spillovers; monetary union; short run |
Keywords |
| E61; E62; F41 |
JEL classification |
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