International spillovers of fiscal news shocks

This paper investigates the domestic and international transmission of U.S. fiscal news shocks emphasizing the importance of the sentiment channel for the global economy. We identify these shocks using federal government spending forecasts from the Survey of Professional Forecasters. Employing the local projection method, we find that anticipated increases in U.S. government spending are expansionary domestically, leading to improved sentiment and enhanced financial conditions. On the other hand, the U.S. dollar appreciates, and the U.S. trade balance deteriorates when future fiscal expansion is expected. In the international context, we apply panel local projection models across a broad set of countries and show that positive sentiment and improved financial conditions driven by U.S. fiscal news spill over, stimulating demand and output growth in other economies. However, we find no significant effect of currency depreciation on net exports in a broad sample as rising domestic demand tends to boost imports. In turn, in a subsample of countries with high trade exposure to the U.S., the trade channel becomes significant, while financial channel diminishes in importance. At the same time, sentiment channel appears to play a significant role in all subsamples. Finally, we find that positive fiscal news shocks have strong stimulating effects (both domestic and international) during US recessions but not in expansions.