Download Trade Dynamics in the Euro Area:

The International Spillover of Fiscal
Spending on Financial Variables
Discussion
DNB/IMF Workshop Preventing and Correcting Macroeconomic
Imbalances in the Euro Area
14 October 2011
Peter Wierts
Summary results
Two types of countries
- Large, sustainable fiscal policy (L&S)
- Small, doubt on fiscal sustainability (S&D)
Effect fiscal shock on foreign financial variables
- L&S: foreign gov. & corp. yields, equity prices
- S&D:
- S&D*: gov. yields corp. yields equity prices
- L&S*: gov. yields corp. yields equity prices
Questions
• Difference in responses statistically significant?
• What are the co-integrating variables? Which
common global variables (only real interest
rate?)
xit  i 0  i1t  i xi ,t 1  i 0 xit*  i1xi*,t 1  i 0dt  i1dt 1   it
• Trade weights appropriate? Robustness?
What would drive the result
• Fiscal shock from L&S country: increase in
interest rate spills over
Cannot be effect on sovereign risk premium;
effect on world interest rate? But that one is
exogenous
• Fiscal shock from S&D country
Effect reflects sovereign risk premium?
Policy implications:
need for balanced decision making
• See 2008 Economic recovery plan:
Immediate coordinated fiscal expansion, 1,2%
GDP by Member States
Expenditure mentioned first (most effective)
• Reads as one sided policy decision. Focus only
on effect on growth. Nothing on side effects/
international financial spillovers in euro area.