The Transmission of Fiscal Policy Shocks: International Spillovers and Non-Linearities

Nicar, Stephen B.

Graduate Thesis Or Dissertation

The Transmission of Fiscal Policy Shocks: International Spillovers and Non-Linearities Public Deposited

Analytics

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Citeable URL: https://scholar.colorado.edu/concern/graduate_thesis_or_dissertations/4f16c288d

Abstract

My dissertation addresses two issues that have not been adequately addressed in the empirical literature on the effects of fiscal policy: the possibility that U.S. fiscal policy has economically significant spillovers to other countries and the possibility that discretionary fiscal policy may have different effects in recessions and expansions. In the first chapter I estimate the magnitude and direction of spillovers from U.S. fiscal policy shocks to Canada, Japan, and the U.K. I find that U.S. government spending and net tax increases can be either beneficial or harmful for our trading partners. The magnitudes are generally moderate, with the response to a government spending increase typically an order of magnitude larger than the response to a net tax increase. In the second chapter I examine whether the spillovers to Canada vary across U.S. recessions and expansions and whether the responses vary non-linearly with the size or direction of the change in U.S. government spending. I find that there are indeed different effects in recession and expansion, but that the differences are short-lived, lasting no more than a few quarters. The use of a non-linear empirical model does not seem to matter much in estimating the direction of the responses to an increase in U.S. government spending, but the magnitudes of the effects on the real exchange rate and the trade balance are significantly larger than those estimated using a linear model. In the third chapter I shift the focus to the domestic effects of fiscal policy in Canada. I compare the responses of several Canadian macroeconomic series to increases in government spending in recession and expansion. With the notable exception of GDP, I find that the difference in responses across regimes is generally not significant in a statistical or qualitative sense. For GDP I find that the response to government spending shocks is negative in both recessions and expansions, but the magnitude of the response in recession is significantly larger.

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