Essa dissertação pressupõe a existência de um trade-off enfrentado pelos políticos em anos de eleição. Se por um lado a possibilidade de realizar ciclos da política econômica em ano eleitoral pode refletir em aumento da probabilidade de reeleição, por outro lado é razoável supor que o político incorre em algum tipo de custo ao realizar ciclos. A partir dessa suposição, essa dissertação investiga se os ciclos políticos são menores em situações em que o político incumbente possui, ex-ante, uma alta probabilidade de se reeleger. Essa investigação é feita a partir da análise da despesa dos municípios brasileiros no período de 1997 a 2007. Os resultados mostram que existem evidências de que em anos eleitorais os gastos são distorcidos em favor das despesas com transferências. Os resultados também indicam que em situações em que o candidato possui, ex-ante, uma grande probabilidade de ser reeleito, os ciclos são menores, o que parece de acordo com a hipótese de existência de custos para a realização de ciclos. / This dissertation assumes the existence of a trade-off faced by politicians in election years. On one hand the possibility of cycles in election years may reflect in increased probability of re-election. On the other hand it is reasonable to assume that the politician incurs in some kind of cost to do political cycles. From this assumption, this paper investigates whether political cycles are smaller in situations where the incumbent politician has, exante, a high probability of reelection. This research is done by analyzing the expenditure of Brazilian municipalities in the period 1997 to 2007. The results shows that there is evidence that spending in election years are distorted in favor of spending on transfers. The results also indicate that in situations where the candidate has, ex-ante, a high probability of being reelected, the cycles tend to be smaller, which seems to be in line with the hypothesis postulated in this dissertation.

The purpose of this thesis is to investigate the dynamics pertaining to emerging market business cycles, with special attention to the linkage between financial conditions and the behavior of the macroeconomic variables in such economies. Business cycles in emerging economies differ in many dimensions when compared with advanced economies: the former are characterized by much larger swings in real activity, financial markets, and policy driven variables. For example, when it comes to important macroeconomic variables, output tends to be twice as volatile in emerging economies compared to their developed counterparts. Another interesting discrepancy is related to the fiscal variables: while government consumption spending tends to be countercyclical in advanced economies, in many emerging economies, government spending is procyclical, which tends to reinforce the volatilities of the macro aggregates. The present work tries to shed some light on the role of financial instability in the emerging market business cycles and how the procyclicality of the fiscal policy can be attenuated by the introduction of fiscal debt-targeting rules. Chapter 1 starts by accessing the empirical implications of financial frictions for the business cycles and dynamics in emerging economies. Using a two-step procedure, the chapter first estimates unobservable financial stress indexes for 25 emerging markets to measure the evolution of the conditions of the financial markets in these countries over the period 1994Q1 to 2015Q4. With the financial indexes at hand, the chapter introduces a novel Hierarchical Bayesian Threshold VAR Model that uses Bayesian pooling to efficiently estimate the posteriors of the VAR parameters for each economy. The findings are summarized as follows: (a) stressful times occur with considerable frequency in the data (~ 30 % of the time); (b) second moments of the main macroeconomic variables are regime dependent, with consumption and investment being more correlated with GDP and with larger volatility for all variables considered under financial distress conditions; (c) consumption is more volatile that the GDP both in a regular financial condition and under a financial distress period; (d) the duration of the financial instability period is about 5.4 quarters; (e) nonlinear impulse responses show strong amplification effects related to the tightening of the credit conditions. In Chapter 2, a model in which financial instability emerges endogenously as an outcome of the presence of occasionally binding constraints is used to show that many of the nonlinearities documented in Chapter 1 can be understood as consequences of financial frictions. The chapter builds on a simplified version of the model introduced by Mendoza (2010) and features a Fisherian Debt-Deflation mechanism coupled with the presence of pecuniary externalities associated with the price of capital stock and wages. By using simulation techniques over fully nonlinear global solution methods, the channels through which financial friction affect the business cycles are disentangled. The Fisherian Debt-Deflation mechanism and the two pecuniary externalities magnify the volatility of the macro-variables whenever a crisis is expected in the future. In such a situation, uncertainty goes up and rational expectation agents increase precautionary savings to insure against the crisis. As extensions, two sources of financial frictions are added to the model: (i) a stochastic volatility in the process for the real interest rate - motivated by the results of the estimation of the time-varying parameters VAR (TVP-VAR) for 9 emerging economies; (ii) a financial shock affecting the collateral constraint. The results, conditioned on a specific regime, are consistent with those observed in Chapter 1. However, the additional sources of exogenous uncertainty pose a reduction in the likelihood of crises occurring because of the precautionary savings. This suggest that matching the observed frequency of regime switching is challenging for models with endogenous crises. Chapter 3 studies the implications of simple debt-dependent rules in emerging countries subject to endogenous financial crises with pecuniary externality. The analysis suggests that debt rules that account for the effects of debt accumulation on asset prices can be relatively more efficient in reducing the likelihood of financial crises, but can have substantial impacts on welfare whenever a crisis is likely to happen. Fiscal consolidations based on ad-hoc debt growth may be counterproductive during good times while having significant negative effects on welfare during crisis episodes. Simulated exercises suggest that, when carefully designed, fiscal rules based on debt target can result in welfare gains. Finally, it is worthwhile mentioning that, while solving the nonlinear models in Chapters 2 and 3, the thesis extends the algorithms developed in Maliar and Maliar (2013) and in Arellano et. al. (2016) of the so-called Envelop Condition Method to deal with occasionally binding constraints. This method, coupled with piece-wise linear interpolation/extrapolation techniques, is robust to the presence of the kinks in the policy function and capable of accounting for the distorted equilibrium and expectation effects. / O propósito desta tese é investigar a dinâmica dos ciclos reais em economias emergentes, com atenção especial à relação entre as condições financeiras e o comportamento das variáveis macroeconômicas em tais economias. Os ciclos de negócios nos mercados emergentes diferem-se sobremaneira relativamente aos das economias avançadas: nos primeiros, as oscilações são bastante mais pronunciadas em termos de variáveis reais, de mercados financeiros e de variáveis associadas às políticas macroeconômicas. Por exemplo, em se tratando de variáveis macroeconômicas, o produto tende a ser duas vezes mais volátil em países emergentes comparativamente aos países desenvolvidos. Outra diferença interessante relaciona-se às variáveis fiscais: enquanto o gasto do governo tende a ser anticíclico em economias avançadas, em muitos países emergentes tal variável é comumente pró-cíclica, o que tende a reforçar a volatilidade dos agregados macroeconômicos. O presente trabalho visa esclarecer o papel das instabilidades financeiras nos ciclos econômicos em países emergentes e como a pró-ciclicidade de variáveis fiscais pode ser atenuada pela introdução de regras fiscais dependentes de dívida. O Capítulo 1 busca acessar empiricamente as implicações de fricções financeiras para os ciclos e para a dinâmica dos países emergentes. Usando um procedimento de dois estágios, o capítulo inicialmente estima índices de estresse financeiro para uma amostra de 25 economias emergentes visando construir medidas de como as condições financeiras em tais países se comportaram no período de 1994T1 até 2015T4. Em um segundo estágio, o capítulo introduz um modelo vetorial auto-regressivo (VAR) hierárquico bayesiano com efeitos limiares que usa técnicas de pooling bayesiano para estimar eficientemente os parâmetros dos VARs em cada um dos países. Os resultados são resumidos da seguinte maneira: (a) períodos de estresse financeiro ocorrem com frequência considerável nos dados (aproximadamente 30% do tempo); (b) segundos momentos de importantes variáveis macroeconômicas são regime-dependentes, com consumo e investimento sendo mais correlacionado com o produto e com maior volatilidade sob condições financeiras mais restritas; (c) o consumo é mais volátil do que o produto tanto em regimes de liquidez normais quanto em regimes de estresse financeiro; (d) a duração de um período de estresse financeiro é, em média, de 5.4 trimestres; (e) funções de resposta impulso não lineares denotam grandes efeitos de amplificação associados ao aperto nas condições de crédito. No Capítulo 2, um modelo em que instabilidade financeira emerge endogenamente como resultado da presença de restrições ocasionalmente ativas é utilizado para mostrar que muitas das não linearidades documentadas no Capítulo 1 podem ser entendidas como consequências de fricções financeiras. O capítulo baseia-se numa versão simplificada do modelo introduzido por Mendoza (2010), que se caracteriza pela presença de um mecanismo de deflação de dívida à lá Fisher e pela presença de duas externalidades pecuniárias que amplificam a volatilidade macroeconômica caso os agentes formulem expectativas de crise no futuro. Em tal situação, a incerteza se eleva e agentes racionais elevam a poupança precaucionaria como um seguro contra crises. Como extensões, duas fontes adicionais de fricções financeiras são adicionadas ao modelo: (i) volatilidade estocástica no processo da taxa real de juros - motivada por resultados de estimações de VARs com parâmetros variantes no tempo para 9 países emergentes; (ii) um choque financeiro que afeta a restrição de colateral da economia. Os resultados, condicionando-se num regime específico, são consistentes com aqueles do Capítulo 1. Entretanto, fontes adicionais de incerteza induzem uma queda na probabilidade de crise devido ao aumento na poupança precaucionaria. Tal resultado sugere que replicar a frequência de mudança de regime observada nos dados é uma tarefa não trivial para modelos com crises financeiras endógenas. O Capítulo 3 estuda implicações de regras fiscais simples dependentes de dívida em pequenas economias abertas sujeitas a crises financeiras endógenas com externalidade pecuniária. A análise sugere que regras ficais que acomodam os efeitos da acumulação de dívida sobre os preços dos ativos tendem a ser relativamente eficientes em reduzir as consequências das crises, mas podem ter impactos substanciais sobre o bem-estar caso uma crise possa ocorrer. Consolidações fiscais baseadas em regras ad-hoc desenhadas sobre o crescimento da dívida podem ser contraprodutivas nos momentos normais dos ciclos, e podem ter efeitos negativos significantes nos momentos de crise. Exercícios de simulação sugerem que, caso desenhadas com certo cuidado, regras fiscais baseadas em metas para o montante de dívida podem resultar em ganhos de bem-estar. Ressalta-se que, ao resolver os modelos não lineares nos capítulos 2 e 3, a tese estende os algoritmos desenvolvidos em Maliar e Maliar (2013) e Arellano et. al. (2016) do chamado Método Das Condições de Envelope para lidar com restrições ocasionalmente ativas. Tal método, combinado a técnicas de interpolação lineares, é robusto à presença de kinks nas policy functions e capaz de acomodar equilíbrios com distorção e efeitos expectacionais.

Esta dissertação é um estudo empírico que relaciona variáveis fiscais como dívida pública e déficit primário com a taxa de juros nominal de longo prazo, relação, que na literatura empírica como um todo, é bastante ambígua. Quando separamos, desta literatura, os trabalhos que incluem expectativas de déficits, obtemos resultados positivos e significantes, ou seja, que a contenção fiscal reduz a taxa de juros de longo prazo. Ainda nesta literatura, poucos trabalhos fazem uso de dados de painel devido à pouca disponibilidade de dados. Dessa forma, usamos um painel com 25 países e dados anuais entre 1980 e 2009. Assim, estimam-se modelos estáticos e dinâmicos em que a taxa de juros nominal de longo prazo é explicada pela dívida pública e, principalmente, o déficit primário, controlando a existência de efeitos fixos para países e anos. Utilizamos, em seguida, modelos não-lineares, para captar efeitos das variáveis fiscais de forma não-linear e com variáveis interativas. Encontra-se uma relação positiva entre as variáveis, indicando que um aumento no déficit primário leva a um aumento na taxa de juros nominal de longo prazo. A magnitude do efeito estimado é semelhante a outros estudos feitos com dados em painel. Os resultados apontam que um aumento em um ponto percentual do déficit primário leva a um aumento de zero a 10 bps sobre a taxa de juros nominal de longo prazo. Já para a dívida pública encontramos que, ao contrário do que esperaríamos pela teoria, que seu efeito sobre a taxa de juros nominal de longo prazo é insignificante e menor do que o encontrado na maior parte da literatura, menos de 2 bps, mas semelhante aos de outros trabalhos. Ao contrário de toda literatura para dados em painel, incluímos também a expectativa de déficits, variável que deveria incorporar mais informação do que somente o déficit corrente e, por isso, nossos resultados deveriam ser mais significantes. No entanto, estas variáveis não estão disponíveis para muito anos e, portanto, para esta parte do trabalho nossa amostra se reduz para 1996-2009. Contudo, ao fazermos as mesmas estimações que as anteriores, mas com a expectativa de déficit obtemos coeficientes para o déficit primário insignificantes, nem sempre positivos e baixos. Este resultado parece ser devido à amostra reduzida que temos para expectativa de déficit. / This dissertation is an empirical study that tries to capture the relationship between fiscal variables, such as the public debt and the primary deficit, and the long-term nominal interest rates, a relationship that in the empirical literature as a whole is very ambiguous. However, when, in this literature, we look only at papers that include expected deficits, we obtain positive and significant results. In the same set of studies, few use panel data due to low data availability. We use a panel with 25 countries and annual data between 1980 and 2009. We estimate static and dynamic models in which the long-term nominal interest rate is explained by the public debt and, especially, the primary deficit by controlling for the existence of fixed effects for countries and years. We then estimate non-linear models to capture the non-linear and interactive effects of fiscal variables on interest rates. We find a positive and statistically significant relationship between these variables, indicating that the primary deficit has a positive impact on the long-term nominal interest rate. The magnitude of the estimated effect is similar to other studies with panel data. They show that a one percentage point increase in the primary deficit leads to an increase from zero to 10 bps in the long-term nominal interest rate. As for the public debt, we find that, contrary to what we would expect from economic theory, its effect on the long-term nominal interest rate is negligible and smaller than that found in most of the literature, less than 2 bps, but similar to other panel studies. Unlike the rest of the literature that uses panel data, we included deficit expectations that would incorporate more information than just the current primary deficit and would, therefore, give us more statistically significant results. However, these variables are not available for large periods of time for a panel of countries and, therefore, for this part of our study, our sample is reduced to the period 1996-2009. This time, even though we estimate the same models, but now with the deficit expectations, we now obtain statistically insignificant, sometimes negative and lower coefficients for the primary deficit. Nevertheless, these results seem to be due to the small sample size we have for deficit expectations.

Analisamos a interação entre as políticas fiscal e monetária na história econômica recente do país, avaliando em que medida essas políticas atuaram de forma complementar ou substitutiva. O trabalho que seguiu a linha de Zoli (2005), adotando algumas propostas de Mélitz (2000). Focamos, desta forma, na estimação de uma função de reação da política monetária às variáveis fiscais, controlando tal reação por outras variáveis que afetam o primeiro instrumento. Regredimos as equações utilizando o método MQO com matriz de variância e covariância robusta a autocorrelação e heterocedasticidade (Newey-West HAC). Para melhor avaliar a evolução do valor e da significância do coeficiente de reação da política monetária à fiscal realizamos regressões em janelas móveis de vinte e vinte e quatro trimestres. Encontramos indícios de que a política de juros, no período pré-1999, respondeu mais a variáveis relativas às crises financeiras internacionais e a risco. Por outro lado, a maioria das nossas especificações sugeriu haver uma mudança estrutural na natureza dessa interação no período pós-1999Q2. A partir desse trimestre, encontramos maiores indícios de que as políticas atuaram de forma complementar, atuando no mesmo sentido (ambas contracionistas, ou ambas expansionistas). / We analyzed the interaction between fiscal and monetary policies in the recent Brazilian economy, searching in what sense these policies were conducted in complementary or substitutive way. This work followed the proposition of Zoli (2005) and adopted some suggestions of Mélitz (2000). We estimated a monetary policy reaction function, focusing in the reaction of this instrument to fiscal indicators. We adopted the OLS method with variance estimates robust to autocorrelation and heteroscedasticity (Newey-West HAC). To comprehend the evolution of magnitude and significance of the monetary policy reaction to fiscal policy, we regressed equations in moving window of twenty and twenty-four months length. We found indications that the interest rate policy, in the pre-1999 years, reacted mainly to variables related to the financial crisis of those years and to sovereign risk indicators. In the other hand, most of our specifications suggested a structural break in the nature of this interaction in 1999Q3. This quarter on, we found evidences that monetary and fiscal policies were conducted in a complementary way (both tight or both easy).

The purpose of this dissertation is to examine three distributional issues in macroeconomics. First I explore the effects fiscal federalism on economic growth across regions in China. Using the comprehensive official data set of China for 31 regions from 1952 until 1999, I investigate a number of indicators used by the literature to measure federalism and find robust support for only one such measure: the ratio of local total revenue to local tax revenue. Using a difference-in-difference approach and exploiting the two-year gap in the implementation of a tax reform across different regions of China, I also identify a positive relationship between fiscal federalism and regional economic growth. The second paper hypothesizes that an inequitable distribution of income negatively affects the rule of law in resource-rich economies and provides robust evidence in support of this hypothesis. By investigating a data set that contains 193 countries and using econometric methodologies such as the fixed effects estimator and the generalized method of moments estimator, I find that resource-abundance improves the quality of institutions, as long as income and wealth disparity remains below a certain threshold. When inequality moves beyond this threshold, the positive effects of the resource-abundance level on institutions diminish quickly and turn negative eventually. This paper, thus, provides robust evidence about the endogeneity of institutions and the role income and wealth inequality plays in the determination of long-run growth rates. The third paper sets up a dynamic general equilibrium model with heterogeneous agents to investigate the causal channels which run from a concern for international status to long-run economic growth. The simulation results show that the initial distribution of income and wealth play an important role in whether agents gain or lose from globalization.

The South African fiscal legislators have found it necessary to introduce anti-avoidance legislation which governs controlled foreign companies in order to counteract schemes devised by taxpayers where companies are established outside South Africa for the purpose of diverting income from the South African fiscal net. Whilst the enforcement of such legislation does have merit in that the intention behind the introduction of such domestic legislation is to prevent the erosion of the South African tax base, it is submitted that this does pose a problem from an international perspective. The objective of this treatise is to conduct a critical analysis of how compatible the South African fiscal legislation which governs controlled foreign companies is with the provisions of the double taxation agreement as prescribed in terms of the OECD Model Tax Convention (which was published in July 2010). In addition, the aim of this study is to deduce whether the purpose of the double taxation agreement is not only the avoidance of juridical double taxation but also that it addresses the avoidance of economic double taxation. This will assist in determining whether domestic controlled foreign company legislation (as embodied in section 9D of the Income Tax Act 58 of 1962) conflicts with the purpose of the double taxation agreement. By conducting an extensive research study and by depicting a certain scenario which addresses the issue at hand, the following is concluded: The tax treatment of the business profits generated by a controlled foreign company resident in a State outside South Africa and which have been generated from active business operating activities, is held to be in agreement with the provisions of the double taxation agreement. By contrast, the tax treatment of the controlled foreign company’s passive income in the form of interest income, is found not to correlate with the aforesaid agreement. As will be demonstrated in the chapters that follow, the controlled foreign company’s interest income is subjected to economic double taxation in terms of the scenario depicted in this treatise. This means that such income is taxed twice in the hands of two different taxpayers in two different States. As a result of this it is submitted that the following problem arises: Because section 9D of the Income Tax Act causes economic double taxation to occur (as illustrated in the previous paragraphs) and owing to the fact that the purpose of the double taxation agreement is the avoidance of economic double taxation, it can be shown that the section 9D domestic legislation conflicts with the terms of the double taxation agreement. This conflict is considered to be an area of concern because a contravention of the purpose of the double taxation agreement is regarded as a breach of the Contracting States’ international obligations in terms of the aforesaid agreement. It is further submitted that paragraph 23 of the OECD Commentary on article 1 and paragraph 14 of the OECD Commentary on article 7 are incorrect when they express the sentiment that domestic controlled foreign company legislation does not conflict with the provisions of the double taxation agreement. It is proposed that this be corrected to state the contrary.

This study examines the relationship between state-wise development expenditures and observed levels of development under the umbrella of the Reserve Bank of India’s implicit guarantee of state bonds. By analyzing the correlation between certain variables outside of each state’s control and levels of development, this thesis aims to determine which Indian states outperform or underperform their predicted levels of development. Moreover, it will aim to identify patterns of development expenditure that led to outperformance or underperformance. States that underperform predicted levels of development while spending above the state-wise average on relevant development sectors can be said to have squandered development expenditures, while those that outperform predicted levels while spending below the state-wise mean likely spend more efficiently. Both of these observations have implications for the central bank’s implicit guarantee policy.

The dissertation deals with the interplay of fiscal and monetary policy in face of uncertainty about the estimation of the true output gap. Theoretical framework of the dissertation set this interplay of monetary and fiscal policy into the realm of game theory, in particularly non-cooperative games of the Nash and Stackelberg equilibrium, respectively. The theoretical framework continued with a description of various methods used for estimation of potential output and output gap, with a special emphasis on methods used in both the Czech National Bank and Czech Ministry of Finance. In the applied part of the dissertation, I studied the interplay of monetary and fiscal policy in the case of Czech economy facing an uncertainty about the estimation of the true output gap. I studied the impact of this interplay on major macroeconomic variables and I tried to determine, which of these two policies plays the role of a leader and which plays the role of a follower in the case of Czech economic environment.

Trinidad and Tobago is a small open economy that faces macroeconomic policy challenges which are related to imperfections in the financial sector and volatility of energy sector revenues. Specifically, two of the key issues policymakers are grappling with are high levels of excess reserves and the optimal management of the economy's resource revenues—in the face of domestic and external shocks to the energy sector. This thesis uses a general equilibrium modeling approach to examine the dynamic effects of these policy challenges on the Trinidad and Tobago economy. In the first case, this study examines the financial and real effects of excess reserves in a New Keynesian Dynamic Stochastic General Equilibrium model with monopoly banking, credit market imperfections and a cost channel. The model explicitly accounts for the fact that banks in Trinidad and Tobago hold excess reserves and they incur costs in holding these assets. Simulations of a shock to required reserves show that although raising reserve requirements is successful in sterilizing excess reserves, it creates a procyclical effect for real economic activity. This result implies that financial stability may come at a cost of macroeconomic stability. The findings also indicate that using an augmented Taylor rule in which the policy interest rate is adjusted in response to changes in excess reserves reduces volatility in output and inflation but increases fluctuations in financial variables. To the contrary, using a countercyclical reserve requirement rule helps to mitigate fluctuations in excess reserves, but increases volatility in real variables. Moreover, this research uses an open economy Dynamic Stochastic General Equilibrium model to analyze the transmission of resource price shocks and a shock to resource production in the Trinidad and Tobago economy. It also applies alternative fiscal rules to determine the optimal allocation of resource windfalls between spending today and saving in a sovereign wealth fund. The results show that spending all the resource windfall on consumption and investment creates more volatility and amplifies Dutch disease effects, when compared to the case where all the excess revenues are saved. Also, neither a policy of full spending nor full saving of the surplus revenue inflows is optimal if the government is concerned about both household welfare and fiscal stability. In order to minimize deviations from both objectives, the optimal fiscal response suggests that a larger fraction of the resource windfalls should be saved, than what the government is presently saving.

Chapter 1- How well-off or worse-off a country can be by joining a currency union in the presence of structural heterogeneity and idiosyncratic shocks? In light of the proposed creation of a currency union for the Economic Community of the West African States (ECOWAS), we develop a three-region DSGE model to explore the question. We divide the ECOWAS into three regions-Nigeria, the existing WAEMU (West-African Economic Monetary Union), and the rest. Considering two monetary regimes (monetary union and monetary independence), we assess the heterogeneity in the responses to country-specific productivity and terms-of-trade shocks in these two regimes, as well as the costs related to the loss of monetary independence. Our results indicate that shocks hitting a given region generate cross-border spillover effects, whose sign and magnitude depend not only on the nature of the disturbance but also on its origin and on the monetary policy regime considered. Moreover, the propagation of shocks across regions is magnified under the monetary union regime. Shocks hitting Nigeria's economy tend to have a more destabilizing effect on the other regions, especially when they are inside the union. Our results also suggest that the proposed monetary union for the ECOWAS region can potentially lead to welfare improvement for all the members, but the magnitude of the welfare gain is relatively small. Chapter 2- In this chapter, we develop a multi-region New-Keynesian Dynamic Stochastic General Equilibrium (DSGE) of the West-African countries to provide a quantitative analysis of intergovernmental fiscal transfers in the context of the proposed creation of a monetary union. We assess the potential role of fiscal transfers in the stabilization of business cycle fluctuations in the projected monetary union in the presence of idiosyncratic shocks. Starting from a baseline scenario with no fiscal transfers among the regions, we analyze the dynamic and welfare impacts of full and partial fiscal equalization schemes with nominal tax revenue sharing within the union. We consider adverse productivity and term-of-trade shocks. Our simulation results suggest that the transfer mechanism is an efficient stabilizing tool. However, the stabilization property of the fiscal transfer system hinges upon the full or partial nature of the compensation system. Moreover, the ability of the transfer system to absorb the negative effects of idiosyncratic shocks depends not only on the type of shock but also on the size of the region directly affected. Chapter 3- We analyze in this chapter the macroeconomics effects of fiscal policy shocks in the Economic Community of West African States (ECOWAS). To that end, we use a Global Vector Autoregression (GVAR) model, which allows us to assess both the within country and the cross borders spillover effects of the fiscal shocks. For the dynamic analysis, we consider negative country-specific public spending and revenue shocks affecting Nigeria as well as regional public spending and revenue shocks affecting two groups of countries in the area, namely the West African Economic and Monetary Union (WAEMU) and the Rest of ECOWAS (RECOWAS). We provide evidence of considerable cross-country heterogeneity in fiscal spillovers; for instance, spillovers are high for fiscal shocks affecting Nigeria, while the cross-border spillover effects on Nigeria are weak for shocks affecting WAEMU and RECOWAS. Our results also suggest that fiscal policy is very relevant in stimulating real output in each of the ECOWAS countries but limited for the cross-country output stimulation.