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Cross-country fiscal policy spillovers and capital-skill complementarity in currency unions

Author

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  • Davoine, Thomas

    (Institute for Advanced Studies (IHS) Vienna, Austria)

  • Molnar, Matthias

    (Institute for Advanced Studies (IHS) Vienna, Austria)

Abstract

We investigate cross-country fiscal policy spillovers through the integration of capital markets in a currency union and allow capital use in production to differ across countries. Following empirical evidence, we assume that production exhibits capital-skill complementarity. Using a multi-country overlapping-generations model calibrated for 14 European Union countries, we find that output spillovers are small with standard tax reforms but can be sizeable with large government spending increases financed by taxes: long run output losses in shock-free countries can amount to a quarter of the losses in countries hit by the spending shock. Conditional and temporary relaxing of the EU debt ceiling rule could benefit the Union as a whole.

Suggested Citation

  • Davoine, Thomas & Molnar, Matthias, 2017. "Cross-country fiscal policy spillovers and capital-skill complementarity in currency unions," Economics Series 329, Institute for Advanced Studies.
    • Handle: RePEc:ihs:ihsesp:329
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    Cited by:

    1. Thomas Davoine, 2018. "Long Run Consequences of a Capital Market Union in the European Union," EconPol Policy Brief 06, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    2. Thomas Davoine, 2018. "Long Run Consequences of a Capital Market Union in the European Union," EconPol Policy Brief 6, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    3. Davoine, Thomas, 2018. "Population aging and cross-country redistribution in integrated capital markets," Economics Series 337, Institute for Advanced Studies.
    4. Căpraru, Bogdan & Georgescu, George & Sprincean, Nicu, 2022. "Do independent fiscal institutions cause better fiscal outcomes in the European Union?," Economic Systems, Elsevier, vol. 46(2).

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    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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