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This paper analyzes the impact of fiscal spending shocks in a multi-country model with international
production networks. In contrast to standard results suggesting that production network
linkages are unimportant for the aggregate response to macro shocks in a closed economy, we show
that network structures may place a central role in the international propagation of fiscal shocks,
particularly when wages are slow to adjust. The paper first develops a simple general equilibrium
multi-country model and derives some analytical results on the response to fiscal spending shocks.
We then apply the model to an analysis of fiscal spillovers in the Eurozone, using the calibrated sectoral
network structure from the World Input Output Database (WIOD). In a version of the model
with sticky wages, we find that fiscal spillovers from Germany and other some other large Eurozone
countries may be large, and within the range of empirical estimates. More importantly, we find that
the Eurozone production network very important for the international spillovers. In the absence of
international production network linkages, spillovers would be only a third as large as predicted by
the baseline model. Finally, we explore the diffusion of identified German government spending at
the sectoral level, both within and across countries. We find that government expenditures have both
significant upstream and downstream effects when these links are measured by the direction of sectoral
production linkages.
