Models of international fiscal spillovers

Abstract

The paper explores the implications for fiscal policy spillovers that are implied by some of the more widely used open economy macroeconomic models. Starting from the basic New Keynesian open economy model, we look at how different assumptions about price adjustment, size and openness, and the relevance of the zero bound affect the predictions for fiscal spillovers. Our analysis indicates that the direction and magnitude of fiscal spillovers depends sensitively on many structural factors and the stance of monetary policy. Any argument for the use of fiscal policy must take these features into account.