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Jel Classification:F44 

Working Paper
Fiscal multipliers in advanced and developing countries: evidence from military spending
Using novel data on military spending for 129 countries in the period 1988?2013, this paper provides new evidence on the effects of government spending on output in advanced and developing countries. Identifying government-spending shocks with an exogenous variation in military spending, we estimate one-year fiscal multipliers in the range 0.75-0.85. The cumulative multipliers remain significantly different from zero within three years after the shock. We find substantial heterogeneity in the multipliers across groups of countries. We then explore three potential sources leading to heterogeneous effects of fiscal policy: the state of the economy, openness to trade, and the exchange-rate regime. We find that the multipliers are especially large in recessions, in closed economies, and under a fixed exchange rate. We also discuss other potential reasons for heterogeneous effects of fiscal policy, such as its implementation and coordination with the monetary authority. This paper is a significantly revised and extended version of Federal Reserve Bank of Boston Working Papers No. 15-9, circulated under the title ?Output Response to Government Spending: Evidence from New International Military Spending Data.?
AUTHORS: Sheremirov, Viacheslav; Spirovska, Sandra
DATE: 2019-02-01

Working Paper
Output response to government spending: evidence from new international military spending data
Fiscal policy, among other measures, was widely used to stimulate employment and to put the U.S. economy back on track in response to the Great Recession and in a number of previous recessions in both the United States and in Europe. It is striking how much disagreement there was ? and still is ? among policymakers and academics alike about the inner workings of fiscal policy and its effect on output and employment. Estimating fiscal multipliers is methodologically challenging, as government spending often reacts to current or anticipated changes in economic conditions, and requires bold identifying assumptions. Barro (1981), Hall (1986, 2009), Rotemberg and Woodford (1992), and Barro and Redlick (2011), among others, rely on military spending as an exogenous component of government expenditure. However, in the United States after World War II (and even more so after the Korean War), there has not been enough variation in military spending to estimate the multiplier with a high degree of precision. This paper uses data from a large panel of countries with significant time variation in military spending to shed light on the magnitude of the government spending multiplier.
AUTHORS: Spirovska, Sandra; Sheremirov, Viacheslav
DATE: 2015-07-01

Working Paper
U. S. monetary policy and emerging market credit cycles
Foreign banks? lending to firms in emerging market economies (EMEs) is large and denominated primarily in U.S. dollars. This creates a direct connection between U.S. monetary policy and EME credit cycles. We estimate that over a typical U.S. monetary easing cycle, EME borrowers face a 32-percentage-point greater increase in the volume of loans issued by foreign banks than borrowers from developed markets face, with a similarly large effect upon reversal of the U.S. monetary policy stance. This result is robust across different geographical regions and industries, and holds for non-U.S. lenders, including those with little direct exposure to the U.S. economy. Local EME lenders do not offset the foreign bank capital flows; thus, U.S. monetary policy affects credit conditions for EME firms. We show that the spillover is stronger in higher-yielding and more financially open markets, and for firms with a higher reliance on foreign bank credit.
AUTHORS: Bräuning, Falk; Ivashina, Victoria
DATE: 2017-08-29

Working Paper
Output Spillovers from U.S. Monetary Policy: The Role of International Trade and Financial Linkages
We estimate that U.S. monetary policy has sizable spillover effects on global economic activity. In response to a surprise increase in the federal funds rate of 25 basis points, real output in our sample of 44 countries declines on average by 0.9% after three years. We find that international trade is a more important factor than international finance in explaining these spillovers. In particular, countries with a high share of exports and imports in output have 79% larger responses than countries with a low share, whereas we do not find significant heterogeneity depending on a country’s financial openness. Bilateral trade linkages appear to be quantitatively important, as the network amplification effect accounts for 45% of the total spillover effect at the peak horizon. We conclude that trade networks could be an important ingredient of theoretical models focusing on the international effects of U.S. monetary policy shocks.
AUTHORS: Sheremirov, Viacheslav; Bräuning, Falk
DATE: 2019-10-01

Working Paper
The limits of forward guidance
The viability of forward guidance as a monetary policy tool depends on the horizon over which it can be communicated and its influence on expectations over that horizon. We develop and estimate a model of imperfect central bank communications and use it to measure how effectively the Fed has managed expectations about future interest rates and the influence of its communications on macroeconomic outcomes. Standard models assume central banks have perfect control over expectations about the policy rate up to an arbitrarily long horizon and this is the source of the so-called ?forward guidance puzzle." Our estimated model suggests that the Fed's ability to affect expectations at horizons that are sufficiently long to give rise to the forward guidance puzzle is substantially limited. We also find that imperfect communication has a significant impact on the propagation of forward guidance. Finally, we develop a novel decomposition of the response of the economy to forward guidance and use it to show that empirically plausible imperfect forward guidance has a quantitatively important role bringing forward the effects of future rate changes and that poor communications have been a source of macroeconomic volatility.
AUTHORS: Campbell, Jeffrey R.; Melosi, Leonardo; Fisher, Jonas D. M.; Ferroni, Filippo
DATE: 2019-03-20

Working Paper
Trends and cycles in small open economies: making the case for a general equilibrium approach
Economic research into the causes of business cycles in small open economies is almost always undertaken using a partial equilibrium model. This approach is characterized by two key assumptions. The first is that the world interest rate is unaffected by economic developments in the small open economy, an exogeneity assumption. The second assumption is that this exogenous interest rate combined with domestic productivity is sufficient to describe equilibrium choices. We demonstrate the failure of the second assumption by contrasting general and partial equilibrium approaches to the study of a cross-section of small open economies. In doing so, we provide a method for modeling small open economies in general equilibrium that is no more technically demanding than the small open economy approach while preserving much of the value of the general equilibrium approach.
AUTHORS: Chen, Kan; Crucini, Mario J.
DATE: 2016-08-12

Working Paper
Country-specific oil supply shocks and the global economy: a counterfactual analysis
This paper investigates the global macroeconomic consequences of country-specific oilsupply shocks. Our contribution is both theoretical and empirical. On the theoretical side, we develop a model for the global oil market and integrate this within a compact quarterly model of the global economy to illustrate how our multi-country approach to modelling oil markets can be used to identify country-specific oil-supply shocks. On the empirical side, estimating the GVAR-Oil model for 27 countries/regions over the period 1979Q2 to 2013Q1, we show that the global economic implications of oil-supply shocks (due to, for instance, sanctions, wars, or natural disasters) vary considerably depending on which country is subject to the shock. In particular, we find that adverse shocks to Iranian oil output are neutralized in terms of their effects on the global economy (real outputs and financial markets) mainly due to an increase in Saudi Arabian oil production. In contrast, a negative shock to oil supply in Saudi Arabia leads to an immediate and permanent increase in oil prices, given that the loss in Saudi Arabian production is not compensated for by the other oil producers. As a result, a Saudi Arabian oil supply shock has significant adverse effects for the global economy with real GDP falling in both advanced and emerging economies, and large losses in real equity prices worldwide.
AUTHORS: Mohaddes, Kamiar; Pesaran, M. Hashem
DATE: 2015-05-01

Working Paper
To bi, or not to bi? differences in spillover estimates from bilateral and multilateral multi-country models
Asymptotic analysis and Monte Carlo simulations show that spillover estimates obtained from widely-used bilateral (such as two-country VAR) models are significantly less accurate than those obtained from multilateral (such as global VAR) models. In particular, the accuracy of spillover estimates obtained from bilateral models depends on two aspects of economies' integration with the rest of the world. First, accuracy worsens as direct bilateral transmission channels become less important, for example when the spillover-sender accounts only for a small share of the spillover-recipient's overall integration with the rest of the world. Second, accuracy worsens as indirect higher-order spillovers and spillbacks become more important, for example when the spillover-recipient is more integrated with the rest of the world overall. Empirical evidence on the global output spillovers from US monetary policy is consistent with these generic results: Spillover estimates obtained from two-country VAR models are systematically smaller than those obtained from a global VAR model; and the differences between spillover estimates obtained from two-country VAR models and a global VAR model are more pronounced for economies for which the US accounts for a smaller share of their overall trade and financial integration with the rest of the world, and for economies which are more integrated with the rest of the world overall.
AUTHORS: Georgiadis, Georgios
DATE: 2015-11-01

Working Paper
Exposure to international crises: trade vs. financial contagion
I identify new patterns in countries' economic performance over the 2007-2014 period based on proximity through distance, trade, and finance to the US subprime mortgage and Eurozone debt crisis areas. To understand the causes of the cross-country variation, I develop an open economy model with two transmission channels that can be shocked separately: international trade and finance. The model is the first to include a government and heterogeneous firms that can default independently of one another and has a novel endogenous cost of sovereign default. I calibrate the model to the average experiences of countries near to and far from the crisis areas. Using these calibrations, disturbances on the order of those observed during the late 2000s are separately applied to each channel to study transmission. The results suggest credit disruption as the primary contagion driver, rather than the trade channel. Given the substantial degree of financial contagion, I run a series of counterfactuals studying the efficacy of capital controls and find that they would be a useful tool for preventing similarly severe contagion in the future, so long as there is not capital immobility to the degree that the local sovereign can default without suffering capital flight.
AUTHORS: Grant, Everett
DATE: 2016-08-01

Working Paper
Can Trend Inflation Solve the Delayed Overshooting Puzzle?
We develop an open economy New Keynesian model with heterogeneity in price stickiness and positive trend inflation. The main insight of our analysis is that, in the presence of heterogeneity in price stickiness, there is a strong link between trend inflation and the timing of the peak response of the real exchange rate to a monetary policy shock. Without trend inflation, the real exchange rate peaks almost immediately. With trend inflation set at historical values, the peak occurs at around 2 years. Delayed overshooting is a consequence of the interaction between heterogeneity in price stickiness and trend inflation.
AUTHORS: Kara, Engin; Cooke, Dudley
DATE: 2018-01-01

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