International Dimensions of Fiscal Policy Transmission (IMCOR)

IMCOR is a study contract with the Banque de France, led by Giancarlo Corsetti (European University Institute, Universita' di Roma Tre and CEPR), Gernot Mueller (University of Bonn) and Andre Meier (International Monetary Fund)

In the current policy debate on global imbalances, many observers and international institutions, including the IMF, have called for fiscal consolidation in the United States as a necessary measure to reduce the country's large current account deficit. Yet, the basis for assuming strong linkages from fiscal to current account balances is more tenuous than commonly thought: previous work on the international transmission of fiscal policy has actually provided contradictory results as regards the magnitude, or even the sign, of the response of the external balance to a fiscal impulse.

In the project "International Dimensions of Fiscal Policy Transmission", researchers will reconsider theoretical and empirical aspects of fiscal transmission in light of recent advances in modeling and empirical methods. In particular, recent results from general equilibrium and time series analysis conducted by two authors in the team proposing this project, suggest that the degree of openness and market integration plays a key role in shaping the propagation of fiscal shocks on external trade and investment demand, via terms of trade and real interest rate movements, see Corsetti and Müller 2006