1. The International Spillover of Fiscal Spending on Financial Variables Discussion
DNB/IMF Workshop Preventing and Correcting Macroeconomic Imbalances in the Euro Area
14 October 2011
Peter Wierts

2. Summary results Two types of countries
Large, sustainable fiscal policy (L&S)
Small, doubt on fiscal sustainability (S&D)
Effect fiscal shock on foreign financial variables
L&S: foreign gov. & corp. yields, equity prices
S&D:
S&D*: gov. yields corp. yields equity prices
L&S*: gov. yields corp. yields equity prices

3. Questions Difference in responses statistically significant?
What are the co-integrating variables? Which common global variables (only real interest rate?)
Trade weights appropriate? Robustness?

4. What would drive the result
Fiscal shock from L&S country: increase in interest rate spills over
Cannot be effect on sovereign risk premium; effect on world interest rate? But that one is exogenous
Fiscal shock from S&D country
Effect reflects sovereign risk premium?

5. Policy implications: need for balanced decision making
See 2008 Economic recovery plan:
Immediate coordinated fiscal expansion, 1,2% GDP by Member States
Expenditure mentioned first (most effective)
Reads as one sided policy decision. Focus only on effect on growth. Nothing on side effects/ international financial spillovers in euro area.