Speaker: Antonio De Vito
This paper studies how fiscal consolidation (austerity) shocks transmit across countries through multinationals’ internal networks of subsidiaries. Using a large multicountry subsidiary-level data set, we find that local business units cut capital investment in response to a foreign austerity shock. We document two channels that propagate these shocks through firms’ internal networks: production linkages among subsidiaries and financial constraints. In the aggregate, domestic investment and employment decline with higher exposure to fiscal shocks originated abroad, suggesting that such spillover matters for overall economic activity.