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Federal Reserve Bank of Kansas City
Research Working Paper
Global tax policy and the synchronization of business cycles
Nicholas Sly
Caroline Weber
Abstract

Using a 30-year panel of quarterly GDP fluctuations 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 effect of fiscal policy is as large as the effect of trade linkages on comovement, and stronger than the effects of several other common financial and investment linkages. We also show that bilateral tax treaties increase comovement in shocks to nations’ GDP trends, demonstrating the permanent effects of coordination on fiscal 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.


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Nicholas Sly & Caroline Weber, Global tax policy and the synchronization of business cycles, Federal Reserve Bank of Kansas City, Research Working Paper RWP 15-7, 01 Aug 2015.
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Keywords: Bilateral Tax Treaties; Fiscal policy; GDP; Tax treaties
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