Spillover Effect Definition
The spillover effect refers to the effect of a purportedly unrelated event in one context on another event in the other context. Using countries or nations for example, a spillover effect is the impact of an unrelated event in the nation on the event in another nation. Spillover effects can be positive or negative but in most cases, spillover effects are negative.
Despite the fact that the event in one economy or context seem unrelated to the other in another context, the impacts that occur is a spillover effect. Also, a spillover effect can be described as the impact of a primary action on a secondary action even though both actions occurred separately and at different places.
A Little More on What is the Spillover Effect
Generally, a spillover effect refers to the impact of a domestic action that occurred in a nation on the other nations of the world. It describes how an event in one country affects other economies. Spillover effect reflects the presence of connections between countries, in terms of finances or economic value. Take for example the export market, the United States is the largest country in the export market, if a decline in the purchasing power of consumers occur in the US, it can affect other countries on the export market. Hence, a negative occurrence in a country that cause other countries economic or financial pains. Also a positive event in one country spills over to other countries.
Spillover Effects on Unconnected and Safe Haven Economies
Not all countries experience spillover effects. Countries that do not have a deep financial connections or economic relations with other countries in the world are likely not to experience a spillover effect. Such countries are regarded as ‘closed off’ countries because they are a bit distant from the rest of the global market. Also in some cases, countries experience mild impacts of spillover effects of an event in one country, an example was the spillover effects from China that partially affected the eurozone, Japan and the US.
When talking about the concept of ‘safe haven’, when an economy is in a safe haven group and has challenges regarding investments, the investments will be relinquished to the remaining safe havens. This is an instance of positive spillover effects, but they are not as common as negative spillover effects.