New deliverable by IHS published: Cross-Country Long-Run Spillover Effects and Coordination of Fiscal Policy: a Quantitative Exploration for Europe (D1.6).

Abstract: We develop a multi-country CGE-OLG model with detailed structures for the households and the governments. We then perform simulations to quantify spillovers from policy reforms and exogenous shocks typical of crisis and compare some forms of policy coordination, without being comprehensive. In the standard labor and consumption tax reforms that we consider, we find that spillovers are small and that simultaneous implementation of these fiscal reforms, one example of coordination, is not advantageous. Spillovers from exogenous shocks are significantly larger and area-wide shocks have a larger impact than a shock to a country alone. The type of fiscal policy response to a shock matters. An appropriate coordinated policy response can improve domestic economic circumstances and reduce negative spillovers to other countries. The gains are larger in case of an area-wide exogenous shock, but only to a small extent. The temporary violation of public debt rules can be beneficial for all countries.