International Spillover Effects Research Articles

Cooperative fiscal policy at the zero lower bound

This paper investigates the use of fiscal policy in response to a large negative aggregate demand shock which may push the global economy into a liquidity trap. Fiscal policy may be an effective tool to respond to a liquidity trap, but its international spillover effects may operate quite differently from its domestic effects. We derive the optimal cooperative fiscal response to a global liquidity trap in a two country world economy. Surprisingly, we find that the optimal fiscal spending response for a partner country to a negative aggregate demand shock in a source country may be negative. If fiscal policy can be chosen under policy commitment, the optimal response involves current fiscal expansion combined with future fiscal contraction, after the liquidity trap has ended.

The Sensitivity of Non-U.S. Bank Stock Returns to Changes of U.S. Monetary Policy

This paper investigates the international spillover effect of U.S. monetary policy changes on non-U.S. bank stock returns. Our dataset covers 442 non-U.S. banks in 57 countries for 1994-2007. We find that there exists an inverse relationship between non-U.S. bank stock returns and unexpected changes in the U.S. federal funds rate target. Our study provides strong evidence that the sensitivity of non-U.S. bank stock returns varies with regard to the nature and context of monetary policy changes, bank-level characteristics, and country-level institutional factors. Our findings have important implications on international financial stability, trading and hedging strategies, and banking management and regulation.

International R&D spillovers in emerging markets: The impact of trade and foreign direct investment

While economic theory predicts that growth in developing countries will gain significantly from technology spillovers, the empirical evidence on this issue remains relatively scarce. The present study focuses on a panel of 27 transition and 20 developed countries between 1990 and 2006 and uses the latest developments in panel unit root and cointegration techniques to disentangle the effects of international spillovers via inflows of trade and FDI on total factor productivity (TFP). The findings show that imports remain the main channel of diffusion for both sets of countries, while FDI, although statistically significant, has a lower impact on productivity of the recipients. The domestic R&D capital stock plays an active role in Western Europe while in the Eastern part it is less significant owing to lower levels, transitional disinvestment and relative obsolescence. Human capital affects TFP directly as a factor of production as well as indirectly by enhancing a country's absorptive capacity. In aggregate, the results show that transition countries from Eastern Europe and Central Asia seem to enjoy bigger productivity gains from the international diffusion process than their Western counterparts.

Intraday trading volume and international spillover effects

The objective of this paper is to explore whether lagged trading activity in one market contributes to the return and volatility process in other markets, using 5-min concurrent data from German and British equity market. Our results lend support to our initial premise that if international investors have access to the same information set as domestic traders, then after observing foreign trading activity, market makers adjust prices to reflect their expectation of the security value, conditional upon all available information, including prior trades. Our findings clearly indicate that intraday trading volume contains predictive power for cross-border return and volatility processes. Moreover, these volume effects are found to be asymmetric in the sense that the impact of positive volume changes upon foreign stock market volatility is greater than is the impact of negative changes.

Optimal Monetary Policy in an Operational Medium-Sized DSGE Model

We show how to construct optimal policy projections in Ramses, the Riksbank's open-economy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports our view that the model parameters may be regarded as unaffected by the monetary policy specification. We discuss how monetary policy, and in particular the choice of output gap measure, affects the transmission of shocks. Finally, we use the model to assess the recent Great Recession in the world economy and how its impact on the economic development in Sweden depends on the conduct of monetary policy. This provides an illustration on how Rames incorporates large international spillover effects.

R&D, Inter-Industry and International Spillovers of Technology and the Total Factor Productivity Growth of Manufacturing Industries in Canada, 1974 - 1989

The paper offers new econometrics evidence on the relationship between total factor productivity and the R&D expenditures of Canadian manufacturing industries in the presence of inter-industry and international spillovers of technology. The construction of spillover proxies is based on a matrix of Canadian patent counts. The normalized distributions of inventions patented in Canada by each country of the G-7 group are weighted by their respective R&D expenditures to generate estimates of R&D expenditures in other industries in Canada and abroad, creating spillovers that can be used by each Canadian industry. The results confirm Griliches' (1994) finding that the TFP-R&D nexus is strongly influenced by the inclusion or exclusion of the computer industry, whose TFP has been adjusted for quality improvement. They also suggest that the process-related R&D activity appears to have a statistically more significant effect on TFP than the product-related R&D. Federal grants to R&D do not appear to enhance TFP. The estimated effect of spillovers from R&D in other industies in Canada varies over time and, in contrast to former studies, is smaller than the effect of the industry's own R&D. The estimated effect of international spillovers of R&D on TFP is mostly statistically significant. Its magnitude, however, varies over time and is smaller than the effect of industry's own R&D.

International Spillover Effects and Monetary Policy Activism

This paper examines how the preferences of a large economy’s central bank affect the trade-off between output and inflation volatility faced by the central bank of a small open economy by analysing the impact of a global cost-push shock. We demonstrate that under the assumption of producer currency pricing, the trade-off faced by the small open economy is likely to worsen as the foreign central bank becomes more focused on output stabilisation relative to inflation stabilisation; but the opposite is true in the case of local currency pricing.

Corporate Tax Policy and Unemployment in Europe: An Applied General Equilibrium Analysis

AbstractThis paper analyses the impact of corporate taxes on structural unemployment, using an applied general equilibrium model for the European Union. We find that the unemployment and welfare effects of corporate taxes differ considerably among European countries. The magnitude of these effects rises in particular in the broadness of the corporate tax base of a country, and the strength of international spillover effects through foreign direct investment. The effect on unemployment is smaller if the substitution elasticity between labour and capital is large, if international spillover effects operate primarily via multinational profit shifting, and with small labour market imperfections. Although the effect of corporate taxes on unemployment may be smaller than the effect of labour and value‐added taxes (e.g. under relatively strong real wage resistance), the welfare costs of corporate taxation are typically larger for most European countries under plausible parameters, especially under strong international spillovers.

Global Aging Pressures: Impact of Fiscal Adjustment, Policy Cooperation, and Structural Reforms

This paper undertakes a rigorous analysis of the effects of policies to respond to the looming demographic pressures in Europe and elsewhere. We examine the impact of fiscal adjustment by itself and when pursued in combination with tax, labor and product market reforms, using the IMF's Global Fiscal Model (GFM), calibrated to the German economy, the euro area, and the United States. We also explore the international spillover effects of demographic pressures and associated fiscal adjustment, and the benefits of cooperative action. in addition, we examine the extent to which structural reforms (including tax reform) to boost productivity growth, labor participation, and product market competition could ameliorate the adverse short-term effects of adjustment. the results suggest (i) substantial spill-over effects of aging on debt sustainability through international financial channels; (ii) the preferred adjustment package is broad-based relying on both revenue and expenditure measures while avoiding increases in direct taxes; and (ii i) there are substantial benefits from fiscal cooperation. Nonetheless, even a cooperative response has initial contractionary effects, and we show that these effects can be offset by combining fiscal adjustment with expeditious implementation of structural reforms in product and labor markets, as envisaged in the Lisbon Agenda. Moreover, the benefits accrue early and to all income-groups if the reforms are implemented as part of a package.

The international spillover effects of pension reform

This paper explores how pension reforms in countries with PAYG schemes affect countries with funded systems. We use a two-country two-period overlapping-generations model, where the countries only differ in their pension systems. We distinguish between the case where a reform potentially leads to a Pareto improvement in the PAYG country, and where this is impossible. In the latter case, the funded country shares both in the costs and the benefits of the reform. However, if a Pareto-improving pension reform is feasible in the PAYG country, a Pareto improvement in the funded country is not guaranteed.

International and Intergenerational Aspects of Capital Income Taxation in an Endogenously Growing World Economy

AbstractThis paper discusses how capital income taxation affects economic growth and welfare in an endogenously growing world economy with perfect capital mobility and worldwide externalities. Worldwide externalities provide a mechanism for equalizing national growth rates even with different capital income tax rates. The welfare of future generations is more influenced by a change in the growth rate than by the international spillover effect, which has been the primary concern of the previous studies. Moreover, our model finds intergenerational conflicts arising from the change in the growth rate caused by a change in the source tax rate of the foreign country.

Panel Cointegration Estimation of International Knowledge Spillovers

This paper estimates the effect of international knowledge spillovers through import on a country's productivity, using panel data from 13 Organizations for Economic Cooperation and Development (OECD) countries during 1981–1999 and two alternative estimation methods for the panel cointegration model. The results confirm the robust effect of international knowledge spillovers through the flows of intermediate goods import. The magnitude of the effect is much greater in the non-G7 countries than in the G7 countries according to the fully modified ordinary least squares (OLS) estimation. By contrast, domestic knowledge capital stocks help enhance a country's productivity only in the G7 countries.

Harmonization of renewable electricity feed-in laws: A comment

This comment aims at critically analyzing some of the economic efficiency issues that are raised in the paper by Muñoz et al. [2007. Harmonization of renewable electricity feed-in laws in the European Union. Energy Policy 35, 3104–3114] on the harmonization of feed-in law schemes for renewable electricity in the European Union. We comment on the choice between green certificate systems and feed-in laws, but pay particular attention to the implementation and design of a harmonized feed-in law scheme. In the comment we argue first that the approach suggested by Muñoz et al. tends to downplay many of the practical difficulties in assessing the real costs facing investors in renewable electricity, not the least since the presence of regulatory uncertainty about the marginal costs of renewable electricity may be essential for the choice between different support systems. Concerning the benefit side of renewable electricity promotion, the Muñoz et al. (2007) paper builds on an interpretation of the EU Renewables Directive that provides plenty of room for national priorities and that therefore essentially implies that harmonized support premiums per se are of little value. We argue instead that a harmonized system should primarily address the international spillover effects from renewable electricity promotion, not the least those related to improved security of supply in Europe. There exists then a strong case for disregarding the specific national benefits of renewable electricity production in the design of harmonized support systems, and for instead considering international—perhaps at the start bilateral—policy support coordination based on entirely uniform support levels.

International Spillover Effects of Sectoral Tax Differentiation in Unionized Economies

The European Union has recently proposed sectoral tax differentiation as a policy to fight unemployment. The member countries are allowed to reduce the VAT rates on goods and services that are particularly labor intensive and price elastic. The paper provides a theoretical analysis of the effects of such tax reforms, with particular emphasis on the international repercussions of the policies. To that end we develop a two-country and two-sector model with monopolistic competition in the goods market and wage bargaining in the labor market. Policy externalities operate through the endogenously determined terms of trade. We examine how national and supranational commodity tax policies affect sectoral and total employment and characterize optimal commodity taxes with and without international policy cooperation. Some rough estimates of the welfare gains from policy coordination are also presented, using a calibrated version of the model.

Does the Financial Sector Drive Non-Financial Sector M&A Activity?

In this paper we investigate global merger dynamics by examining the causal relationships between merger activity occurring in different industries and different economic frameworks. We test for casual relationship to examine M&A activity using an extensive dataset covering over 400,000 global international M&A transactions announced and completed between 1979 and 2002. The results show that M&A activity in the global non-financial sector initiates M&A activity in the financial sector. EU and US level results indicate that the financial sectors of both economic frameworks do not Granger cause their own non financial sector M&A activity. However, the international spill-over effect suggests that financial institutions in the these countries provide M&A funding to non-financial companies in each other.

Beggar thy thrifty neighbour

This paper explores the international spillover effects of ageing through capital markets when countries have different pension systems. We use a two-country two-period overlapping-generations model, where the two countries only differ in their pension schemes. Two forms of population ageing are considered, namely, an increase in longevity and a fall in fertility. It is shown that, in the long run, a country using a funded pension system experiences negative spillovers from the fact that the other country uses a pay-as-you-go system. The short-run spillovers, however, are opposite to the spillovers in the long run.

Corporate Tax Policy and Unemployment in Europe: An Applied General Equilibrium Analysis

This paper analyzes the impact of corporate taxes on structural unemployment, using an applied general equilibrium model for the European Union. We find that the unemployment and welfare effects of corporate taxes differ considerably among European countries. The magnitude of these effects rise in particular in the broadness of the corporate tax base of a country, and the strength of international spillover effects through foreign direct investment. The effect on unemployment is smaller if the substitution elasticity between labour and capital is large, if international spillover effects operate primarily via multinational profit shifting, and if equilibrium forces on the labour market are strong. Although the effect of corporate taxes on unemployment may be smaller than the effect of labour and value-added taxes (e.g. under relatively strong real wage resistance), the welfare costs of corporate taxation are typically larger for most European countries under plausible parameters, especially under strong international spillovers.

International spill-over effects of labour market rigidities

This paper analyses the implications of real wage rigidities in a two-country stochastic general equilibrium model. It is shown how real wage rigidities in one country affect welfare in both countries. By assuming that the labour unions within each country decide whether wages are flexible or rigid, it is found that wages will be flexible in either none, one or both of the countries. Hence, even in a symmetric model flexible wages in one country and rigid wages in the other may be an equilibrium. Since there are international spill-over effects of the choice of wage setting regime, the utilitarian solution is also considered. Interestingly, this does not necessarily entail more real wage flexibility than in the Nash equilibrium.

International Spill-over Effects of Labour Market Rigidities

This paper analyses the implications of real wage rigidities in a stochastic two-country general equilibrium model. It is shown how real wage rigidities in one country affect welfare in both countries. Assuming that the choice of whether or not to adopt flexible wages is in the hands of labour unions within each country, it is found that wages will be flexible in either no, one or both countries. Hence, even in this symmetric model flexible wages in one country and rigid wages in the other may be an equilibrium. Since there are international spillover effects of the choice of wage setting regime, the utilitarian solution is also considered. Interestingly, this does not necessarily entail more real wage flexibility than in the Nash equilibrium.

The Cross-Country Effects of EU Holidays on Domestic GDP's

The number and the distribution of non-working days during the year has recently entered the policy debate related to the slow pace of the European economy.The fact that the number of non-working days can affect the quarter to quarter performance of GDP is well known and hardly disputable. It has recently been argued that not only domestic holidays can in principle be important in each single economy, but also foreign ones, as far as there exist strict connections among the national economies. Given the existing evidence at the national level relative to the influence of calendar effects on GDP, the first step of the econometric analysis in the present research is a check on the existence (and significance) of international spillover effects. Our investigation uses both structural time series models and the ARIMA model-based approach. These two different approaches are used jointly and their specific features are exploited to represent and estimate the time series components of our interest. The empirical evidence does not support the spillover hypothesis.