It’s tough out there for policymakers seeking to stabilize economies, and shocks from abroad aren’t helping. This column argues that for countries hit by recession, fiscal stimulus in another country might significantly stimulate demand back at home, softening the worse effects of the current crisis. The evidence suggests that transnational coordination of fiscal policy may well be more valuable than previously thought. [...] We document that fiscal stimulus in one country is likely to have economically and statistically significant effects on output in other countries, and that the strength of spillovers vary with the state of the economy in recipient and source countries, with output multipliers being very large in recessions. These results suggest that fiscal activism may be effective in stimulating demand in economic downturns and that coordination of fiscal policies may be more valuable than previously thought.
HT: Mark Thoma