  We propose a novel instrumental variable to identify fiscal shocks in small
open economies. Under the assumptions that unexpected changes in trading
partners correlate with output of an open economy and unexpected fiscal shocks
of a small economy are unrelated to its trading partners' forecast errors, we
use forecast errors of trading partner economies to proxy unexpected shocks in
domestic output. We show that this instrument is relevant and find evidence
that supports its exogeneity. Using this IV strategy, we find that the two-year
cumulative spending multiplier is around 1 for Canada and 0.5 for euro area
small open economies.
