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Globalization and fiscal policy after financial crises

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  • Salamaliki, Paraskevi K.

Abstract

Has globalization affected the use of fiscal policy as a macroeconomic stabilization tool in response to financial crises? We study this question in an empirical model using different dimensions of globalization – political, social, and economic – and de facto and de jure measures of the different dimensions. By estimating Jordà (2005)-type local projections, we first document that higher political, social and economic globalization matter for the policy response to financial crises, producing more contractionary or austerity policies in terms of the high-employment surplus after distress. High initial debt-to-GDP ratios exacerbate to some extent the effects of globalization, producing additional fiscal austerity after financial distress. Second, we find that countries’ degree of policies and conditions that enable or restrict international flows and activities – hence policies “on paper” – matter most for the effects of globalization on the dynamics of fiscal policy after a financial distress, compared to the actual degree of such flows, that is, policies “in practice”. In total, using of fiscal policy as a macro stabilization tool in an environment of increased globalization appears to be restricted. Accommodation and reinforcement of debt externalities, fiscal spillovers and contagion ensuing from increased globalization may have contributed to policymakers’ concerns about debt sustainability and sovereign risk, thus influencing the fiscal policy response.

Suggested Citation

  • Salamaliki, Paraskevi K., 2024. "Globalization and fiscal policy after financial crises," European Journal of Political Economy, Elsevier, vol. 85(C).
  • Handle: RePEc:eee:poleco:v:85:y:2024:i:c:s0176268024000922
    DOI: 10.1016/j.ejpoleco.2024.102590
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    More about this item

    Keywords

    Fiscal policy; Globalization; Fiscal space; Financial crises; Local projections;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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