Abstract
A two-country business cycle model featuring nominal rigidities, countercyclical mark-ups, rule of thumb consumers and government spending reversals is used to identify inequality predictions that are robust across a range of empirically plausible parameterizations. These robust inequality restrictions are imposed onto a regime-change factor model for the United States and its main trade partners to estimate the international fiscal spillovers. The effects of U.S. government spending on foreign real activity are found to be sizable and significant, operating mainly by lowering real interest rates rather than boosting trade balances. In contrast, there seems to be only limited evidence of state dependence in the international transmission of fiscal policy.
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