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Exchange rate regimes and fiscal multipliers

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  • Born, Benjamin
  • Juessen, Falko
  • Müller, Gernot J.
Abstract
Does the fiscal multiplier depend on the exchange rate regime? To address this question, we first estimate a panel vector autoregression (VAR) model on time-series data for OECD countries. We identify the effects of unanticipated government spending shocks in countries with fixed and floating exchange rates, while controlling for anticipated changes in government spending. In a second step, we interpret the evidence through the lens of a New Keynesian small open economy model. We find that government spending multipliers are considerably larger under fixed exchange rate regimes and that the New Keynesian model provides a satisfactory account of the evidence.

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  • Born, Benjamin & Juessen, Falko & Müller, Gernot J., 2013. "Exchange rate regimes and fiscal multipliers," Journal of Economic Dynamics and Control, Elsevier, vol. 37(2), pages 446-465.
    • Handle: RePEc:eee:dyncon:v:37:y:2013:i:2:p:446-465
    DOI: 10.1016/j.jedc.2012.09.014
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    More about this item

    Keywords

    Fiscal policy; Exchange rate regime; Fiscal multiplier; Monetary policy; Panel VAR; New Keynesian model;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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