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Exchange-Rate Regimes and the Effectiveness of Fiscal Policy

Author

Listed:
  • Karras, Georgios

    (University of Illinois)

Abstract

How does the potency of fiscal policy depend on a country’s exchange-rate regime? The Mundell-Fleming theoretical model predicts that fiscal policy can affect output under both fixed and flexible exchange rates, but that the effect is larger when the exchange rate is fixed. Using a panel data set of 61 countries for the 1951-2007 period, the paper shows that fiscal policy is indeed more potent under fixed exchange rates than under flexible, and that the difference is substantial: the estimated models imply that maintaining a fixed exchange rate raises the long-run fiscal multiplier by roughly a third.

Suggested Citation

  • Karras, Georgios, 2011. "Exchange-Rate Regimes and the Effectiveness of Fiscal Policy," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 26, pages 29-44.
    • Handle: RePEc:ris:integr:0528
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    Citations

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    Cited by:

    1. Michael B. Devereux, 2018. "International Fiscal Spillovers: A Review Essay," Korean Economic Review, Korean Economic Association, vol. 34, pages 29-50.
    2. Mora, Jose U Mora & Acevedo, Rafael A, 2019. "Fiscal Policy Effects and Capital Mobility in Latin American Countries," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 34(1), pages 159-188.
    3. José U Mora & Rafael A Acevedo, 2018. "Modelo de Desarrollo Propio y su Potencial para la Construcción de Paz Territorial," Working Papers 39, Faculty of Economics and Management, Pontificia Universidad Javeriana Cali.
    4. Georgios Karras, 2012. "Trade openness and the effectiveness of fiscal policy: some empirical evidence," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 59(3), pages 303-313, September.

    More about this item

    Keywords

    Fiscal Policy; Fixed or Flexible Exchange Rates;

    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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