The Economic Transmission Of Fiscal Policy Shocks From Western To Eastern Europe
Source: Bank of Finland
This paper studies the transmission of a foreign fiscal policy shock (assumed to be generated in Germany) to key macroeconomic variables in Five Central and Eastern European economies (CEE-5). The authors use quarterly data from 1995 to 2009 and estimate an open economy Structural Vector AutoRegressive (SVAR) model identified by imposing reasonable restrictions on contemporaneous responses in the system. Their model is able to identify well-known episodes of fiscal policy action in the countries under review. They find that a foreign fiscal shock affects domestic fiscal variables and vice versa, highlighting the importance of cross-country coordination of fiscal policies within the EU.