News and surprises: Revisiting fiscal shocks in the open economy

Despite extensive research on fiscal policy, evidence on the international transmission of structural fiscal shocks remains limited and inconclusive. We address three gaps. First, we confront the perfect-foresight problem by incorporating a proxy for fiscal policy news into a multi-country VAR model—to our knowledge, the first such study to use this proxy to measure cross-border transmission of US fiscal shocks in a detailed setting. Second, we estimate a Bayesian multi-country VAR that, unlike two-country approaches, fully captures higher-order spillovers. Third, we revisit the interpretation of fiscal multipliers from New Keynesian closed-economy models. We find: (i) international spillovers operate mainly through trade (expenditure switching and boosting); (ii) transmission hinges on each recipient’s growth model; (iii) higher-order spillovers substantially amplify direct spillovers; and (iv) the exchange rate puzzle reflects omitted variables and policy regime effects.