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The Effects of Monetary and Fiscal Policy on Aggregate Demand in a Small Open Economy: An Application of the Structural Error Correction Model

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  • Mr. Tetsuya Konuki

Abstract

This paper empirically analyzes the short-run effects of monetary and fiscal policy on aggregate demand, using the two-step structural error correction method. This method has an advantage over the standard reduced-form error correction method in providing a meaningful interpretation for impulse responses. The results are in sharp contrast to those of the traditional Mundell-Fleming and Dornbusch models: after the monetary (fiscal) policy is relaxed, the home currency depreciates (appreciates) for a substantial period of time, and the aggregate demand first expands (contracts) then gradually returns toward its original path.

Suggested Citation

  • Mr. Tetsuya Konuki, 2000. "The Effects of Monetary and Fiscal Policy on Aggregate Demand in a Small Open Economy: An Application of the Structural Error Correction Model," IMF Working Papers 2000/165, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2000/165
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