Global Tax Policy and the Synchronization of Business Cycles

Using a 30-year panel of quarterly GDP uctuations 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 1/2 a standard deviation. This effect of scal policy is as large as the effect of trade linkages on comovement, and stronger than the effects of several other common nancial 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 scal 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.