CROSS-border fiscal multipliers

In response to the Global Financial Crisis, most countries have adopted expansionary fiscal policies. This has aroused new professional and academic interest in the role of fiscal policy for stabilization. Typically, the literature is concerned with the estimation of domestic fiscal multipliers; that is, the effect of domestic fiscal policy on domestic output (or private consumption). However, in a world characterized by growing economic interdependences, it seems that the cross-border effects of fiscal policy might also be relevant. There is however very little systematic evidence of cross-border fiscal multipliers; that is, the effect of fiscal policy of country X on output (or private consumption) of country Y. This thesis is a first attempt at estimating these cross-border fiscal multipliers. I focus on two pairs of countries: Canada-US and Australia-China. These pairs are interesting and relevant in various respects, including their high degree of economic integration. Using a parsimonious IV econometric model I find that: (i) the effect of a fiscal expansion in the US on Canadian output is positive and significant and (li) the effect of a fiscal expansion in China on the Australian output is negative and significant. The second result is particularly interesting as it might imply that even in a business cycle perspective; the Australian mining sector crowds-out the rest of the economy. Finally, from a policy perspective, the fact that cross-border fiscal multipliers are significant implies that governments (in Canada and Australia) should enrich their fiscal policy reaction function to include the fiscal policy stance of their neighbours (US and China).