U.S. Fiscal Volatility Spillovers to Emerging Economies

Abstract

This paper quantifies the international spillovers of U.S. fiscal volatility shocks to emerging economies (EMEs). We identify U.S. fiscal volatility shocks by estimating fiscal reaction functions with time-varying volatility. A one standard deviation U.S. fiscal volatility shock, similar to the 2011 debt-ceiling episode, reduces output by 0.4 percent and investment by 0.7 percent in EMEs after one year, lasting around 10 quarters. The shock propagates primarily through global financial conditions and commodity prices, affecting EMEs borrowing costs and accounting for 7 percent of EMEs business cycle fluctuations. The impact is lower in economies with inflation-targeting frameworks and fiscal rules.