Fiscal Policy Spillovers in a Monetary Union

This paper investigates spillovers to the Irish economy from a fiscal expansion in the rest of the euro area. We examine spillovers for government consumption and government investment, each conditional on active or passive monetary policy. Moreover, we compare these across two different classes of models, a DSGE model and a traditional structural model. We find that expansionary fiscal spending shocks in the rest of the euro area can lead to non-negligible spillovers to the Irish economy. This result is robust across models and spending instruments, but is conditional on the monetary stance being passive. When monetary policy is active, the spillover is smaller, depending on the extent of crowding out of private activity. When monetary policy is passive, spillovers increase the fiscal space of the country with positive spillovers.