Fiscal policy shocks and international spillovers

The domestic and international transmission mechanism of fiscal policy shocks are analysed in the United States Germany. Using a Bayesian VAR approach, we find that both these countries expansion is associated with increases output as well private consumption investment. terms trade, which affect shocks, depreciate response to expansion, thus transferring some increased purchasing power abroad. A US government spending shock expansionary for all non-US G7 members. German most, but not European economies, within outside euro area. dynamics BVAR can be rationalised using dynamic stochastic general equilibrium model where heterogeneous households firms face borrowing constraints.