Working Paper

Global tax policy and the synchronization of business cycles

Abstract: Using a 30-year panel of quarterly GDP ?uctuations from of a broad set of countries, we demonstrate that the signing of a bilateral tax treaty increases the comovement of treaty partners' business cycles by 1/2 a standard deviation. This e?ect of ?scal policy is as large as the e?ect of trade linkages on comovement, and stronger than the e?ects of several other common ?nancial and investment linkages. We also show that bilateral tax treaties increase comovement in shocks to nations? GDP trends, demonstrating the permanent e?ects of coordination on ?scal policy rules. We estimate trend and business cycle components of nations' output series using an unobserved-components model in order to measure comovement between countries, and then estimate the impact of tax treaties using generalized estimating equations.

Keywords: Bilateral Tax Treaties; Fiscal policy; GDP; Tax treaties;

JEL Classification: E62; F42; H32; H87;

Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 2015-08-01

Number: RWP 15-7

Pages: 40 pages