Heterogeneity, commonality and interdependence in the euro area: size and dynamics of fiscal spillover effects in macroeconomic-financial linkages

The paper develops empirical measures to estimate the strength and dymanic of fiscal spillover effects in the Euro Area. It moves for estimating a Bayesian VAR model of real and financial variables in order to examine in depth economic policy coordination and policy making, with a strong attention on the current financial crisis. Spillovers are estimated recursively with weakly-exogenous common factors. The aim of the project accounts for interdependencies across countries within the Euro Area and derives impulse response functions and conditional forecasts with the output of an Monte Carlo Marco Chain (MCMC) routine. However, the paper attempts to estimate the systemic contribution and cross-country transmission of unexpected shocks on the productivity in the EA between June 1995 and March 2014. Overall, the positive impact on outputs in the financial dimension indicates the importance of coordinated fiscal actions in the EA. Shocks overflow in a heterogeneous way across countries. Moreover, financial variables show higher amplification of spillover effects which can be seen as a result of increased interdependence between variables. Finally, the analysis is consistent and robust with the more recent literature on business cycles, which recognizes the importance of both group-specific and global factors in evaluating cross-country spillovers and responses to an unexpected shocks.