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Loews Philadelphia, Parlor 1
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International Trade and Finance Association
policy may be associated with an international spillover effect. The literature highlights
large multiplier and spillover effects of fiscal policy whereas these effects remain small
in the theoretical literature. Considering international production networks, this paper develops a theoretical explanation consistent with the size of fiscal spillover effects
suggested by the empirical literature. We proceed in two steps. First, we develop a
two-country general equilibrium model with production network and financial frictions
based on Saki Bigio and Jennifer La'O (2016) where labour is not mobile between
countries. We show analytically that in a symmetric two-country world, the network
does not influence the size of multiplier and spillover effects when the fiscal policy is
symmetric. However, in this symmetric world, when public spending increases in only
one of the two countries, international production network matters for multiplier and
spillover effects. The more connected nodes are, the lower the multiplier effect. The
spillover effect is first increasing with the connection of the network and then decreasing. Contrasting with Daron Acemoglu and Vasco M. Carvalho and Asuman Ozdaglar and Alireza Tahbaz Salehi (2012), we get both upstream and downstream effects following a fiscal shock. Because of labour immobility between countries, this fiscal shock leads to a terms of trade adjustment, driving contagion.
European Integration: New Challenges and New Hopes
Paper Session
Friday, Jan. 5, 2018 10:15 AM - 12:15 PM
- Chair: Thierry Warin, HEC Montreal
Fiscal Trade-offs in Open Economies
Abstract
This paper uses a multi-country model calibrated to European economies to assess the trade-offs involved in undertaking permanent fiscal consolidations. The model incorporates frictions that limit adjustments in the short-run. In the long run, the model converges to a frictionless neoclassical environment. The analysis suggests that terms of trade adjustment plays a significant role in the trade off between debt reduction, output growth and welfare.Fiscal Spillovers Within the European Union
Abstract
In a context of a liquidity trap, fiscal policy remains an efficient tool to deal with fluctuations of economic activity. In open economies, the multiplier effect of this fiscalpolicy may be associated with an international spillover effect. The literature highlights
large multiplier and spillover effects of fiscal policy whereas these effects remain small
in the theoretical literature. Considering international production networks, this paper develops a theoretical explanation consistent with the size of fiscal spillover effects
suggested by the empirical literature. We proceed in two steps. First, we develop a
two-country general equilibrium model with production network and financial frictions
based on Saki Bigio and Jennifer La'O (2016) where labour is not mobile between
countries. We show analytically that in a symmetric two-country world, the network
does not influence the size of multiplier and spillover effects when the fiscal policy is
symmetric. However, in this symmetric world, when public spending increases in only
one of the two countries, international production network matters for multiplier and
spillover effects. The more connected nodes are, the lower the multiplier effect. The
spillover effect is first increasing with the connection of the network and then decreasing. Contrasting with Daron Acemoglu and Vasco M. Carvalho and Asuman Ozdaglar and Alireza Tahbaz Salehi (2012), we get both upstream and downstream effects following a fiscal shock. Because of labour immobility between countries, this fiscal shock leads to a terms of trade adjustment, driving contagion.
FDI Flows in Europe: Endogeneity and Credibility
Abstract
The current European sovereign debt crisis has raised questions about the benefits and costs of membership in the Economic and Monetary Union (EMU). This question is extremely difficult to tackle for we need to have a global and complex perspective. There is no truth in a partial analysis. In this article, we decided not to propose a general model, but to look at one of the important components of European financial integration, notably the foreign direct investment (FDI). Indeed, FDI flows are a good indicator of how healthy an economy is, because they positively respond to low political risks, good business environment, stability of the judicial system, etc. In this context, we believe that bilateral FDI flows between the 28 member states of the European Union (EU) are a good indication - although partial - about whether benefits of the EMU membership do exist and if so, whether are significant. The literature is abundant when it comes to studying FDI with an international business focus, but it is scarce on the analysis of FDI in a political economy context. In particular, we develop a structural gravity model, influenced by some very recent theoretical and econometric advancements. This new structural gravity approach provides needed theoretical underpinnings as well as strong support for the econometric estimation of gravity models.Discussant(s)
Oana Peia
,
University College Dublin
Thierry Warin
,
HEC Montreal
Davide Romelli
,
Trinity College Dublin
Linda L. Tesar
,
University of Michigan
JEL Classifications
- E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- F4 - Macroeconomic Aspects of International Trade and Finance