Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/212700
Authors: 
Crespo Cuaresma, Jesús
Eller, Markus
Mehrotra, Aaron
Year of Publication: 
2011
Series/Report no.: 
BOFIT Discussion Papers 12/2011
Abstract: 
This paper studies the transmission of a foreign fiscal policy shock (assumed to be generated in Germany) to key macroeconomic variables in five Central and Eastern European economies (CEE-5). We use quarterly data from 1995 to 2009 and estimate an open economy structural vector autoregressive (SVAR) model identified by imposing reasonable restrictions on contemporaneous responses in the system. Our model is able to identify well-known episodes of fiscal policy action in the countries under review. We find that a foreign fiscal shock affects domestic fiscal variables and vice versa, highlighting the importance of cross-country coordination of fiscal policies within the EU. All the CEE-5 respond to a fiscal expansion abroad with fiscal easing at home (more strongly on the public spending than on the revenue side). We find negative cross-border fiscal spillovers for Slovenia, the Czech Republic and Slovakia, while in Poland and Hungary, output reacts positively to a fiscal expansion in Germany. For domestic fiscal shocks, which we also explore, we find Keynesian responses in Hungary and Slovakia, while non-Keynesian responses are present in the Czech Republic, Poland and Slovenia. Our results imply that one-size-fits-all policy recommendations would be too simplistic for the CEE-5; a deeper understanding of the reasons for cross-country differences in response to fiscal shocks is required to be able to provide adequate information to policymakers in these countries.
Subjects: 
fiscal policy
cross-border spillovers
fiscal multiplier
foreign shock
structural vector autoregression
Central and Eastern Europe
Germany
JEL: 
C54
E62
H2
H5
P2
Persistent Identifier of the first edition: 
ISBN: 
978-952-462-707-8
Document Type: 
Working Paper

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