Framing US leadership as important in the context of fiscal policy is good --- economic reforms that target the root of inequality are likely to spill over globally which lessens the real-world impacts of poverty for the most amount of people.

Using data from the late 1990s until 2019 for the United States and Germany, we find that an increase in government spending is expansionary. It raises output, consumption and crowds in private sector investment. The increase in domestic absorption does not come at the cost of an appreciated real exchange rate. Indeed, the relative price of home-produced goods actually falls, causing the real exchange rate and terms of trade to depreciate. The expansionary effects of government spending are not confined to the home economy. Spillovers between the US and the G7 countries are positive, as are those between Germany and her European neighbours. The dynamics of the macroeconomy implied by the BVAR pose a challenge for macroeconomic modelling, with most existing studies finding negligible or even negative spillovers, as pointed out by Cwik and Wieland (2011). We show that a model with heterogeneous households, firms facing borrowing constraints and nominal rigidities can explain the key salient empirical features following a government spending shock. The model sheds light on potential factors determining the size of international spillovers in response to fiscal shocks. Relative country size matters, with bigger economies generating larger spillovers, as does openness to trade and the import content of government spending. The monetary policy response to fiscal policy also matters; a delayed monetary tightening to what is an inflationary fiscal expansion greatly increases the size of the international spillover. Neither the empirical evidence, nor the theoretical model, suggest an important role for the exchange rate regime in determining the size of the spillover effects of fiscal policy shocks. Criticism of policy proposals for fiscal coordination often hinge on the lack of supporting evidence for international spillovers. Our findings shed new light on this topic by showing not only that the estimated foreign output effects of domestic spending shocks are large but also, that these ca