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Exchange-Rate Regimes and the Effectiveness of Fiscal Policy

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  • 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.

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Bibliographic Info

Article provided by Center for Economic Integration, Sejong University in its journal Journal of Economic Integration.

Volume (Year): 26 (2011)
Issue (Month): ()
Pages: 29-44

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Handle: RePEc:ris:integr:0528

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Web page: http://econo.sejong.ac.kr/
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Related research

Keywords: Fiscal Policy; Fixed or Flexible Exchange Rates;

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Cited by:
  1. Georgios Karras, 2012. "Trade openness and the effectiveness of fiscal policy: some empirical evidence," International Review of Economics, Springer, vol. 59(3), pages 303-313, September.

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