A new policy brief by Thomas Davoine (IHS) has been published in the journal Wirtschaftspolitische Blätter.
The rationale for fiscal policy coordination within the European Union during normal times is weak because cross-country fiscal policy spillovers are found to be small. During crises, spillovers are larger, either because of constraints on monetary policy or because capital markets are well integrated. With a multi-country general equilibrium model assuming perfect capital market integration, I quantify the medium run impact of foreign fiscal actions on Austria. For instance, if Germany is hit by a negative shock and bails out its private sector, the predicted yearly average GDP loss in Austria is 15% of the yearly GDP loss in Germany. Bailouts in smaller European countries lead to weaker spillovers.