Strategic interactions of fiscal policies in Europe: A global VAR perspective

• We use a GVAR model to analyse strategic interactions of EU fiscal policies.
• The model describes the dynamics of private and public saving–investment balances.
• Based on different specifications, we discuss coordination and fiscal discretion.
• Capital flows, uncertainty and nature of shocks define important policy tradeoffs.

The paper analyses the strategic interactions of fiscal policies in the European Union context, by modelling the interdependencies arising between public and private sectors' saving–investment balances. In a global vector autoregressive framework, we use two empirical specifications to reflect some important differences in the sequencing of the policy decision-making process. In this setting, we draw policy implications with respect to fiscal policy coordination and fiscal policy discretion. We highlight the importance of several factors such as global capital flows, uncertainty with respect to policy actions and nature of the shocks, as key elements defining the dimension of the prevailing policy tradeoffs.