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Fiscal foresight: Do expectations have cross-border effects?


This paper estimates the cross-border effects of U.S. fiscal shocks on four main trading partners within a two-country Bayesian VAR framework. Using an identification strategy which differentiates between expected and unexpected government spending shocks, it provides evidence in support of the hypothesis that expectations alter fiscal policy transmission at both national and international level. While an unexpected fiscal stimulus yields negligible cross-border effects, the anticipation of an increase in government spending produces sizable positive spillovers in the medium run.