Bilateral Tax Treaties and GDP Comovement. Issue 2 (8th November 2016)

• Record Type: Journal Article
• Authors: Sly, Nicholas; Weber, Caroline
• Is Part Of: Review of international economics. Volume 25:Issue 2(2017:May)
• Page Start: 292
• Page End: 319
• Publication Date: 2016-11-08
• Subjects: International economic relations -- Periodicals; International finance -- Periodicals; Economic policy -- Periodicals; 330
• DOI: 10.1111/roie.12267
• Languages: English
• ISSNs: 0965-7576

Abstract

Abstract: Using a 30‐year panel of quarterly gross domestic product (GDP) fluctuations from of a broad set of countries, we demonstrate that the signing of a bilateral tax treaty increases the comovement of treaty partners' business cycles by half a standard deviation. This effect of fiscal policy is as large as the effect of trade linkages on comovement and stronger than the effects of several other common financial and investment linkages. We also show that bilateral tax treaties increase comovement in shocks to nations' GDP trends, demonstrating the permanent effects of coordination on fiscal policy rules. We estimate trend and business cycle components of nations' output series using an unobserved‐components model in order to measure comovement between countries and then estimate the impact of tax treaties using generalized estimating equations.