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Trade openness and the effectiveness of fiscal policy: some empirical evidence

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  • Georgios Karras

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Abstract

Is the potency of fiscal policy lower for more open economies, as suggested by economic theory? Using annual data from the period 1951–2007, for 62 developed and developing economies, the paper’s empirical findings show that the effectiveness of fiscal policy is indeed reduced by an economy’s trade openness, and that the effect is quantitatively substantial. In particular, the paper’s estimates suggest that an increase in trade openness by 10% of GDP reduces the magnitude of the long-run fiscal multiplier by 5–6%. Copyright Springer-Verlag 2012

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File URL: http://hdl.handle.net/10.1007/s12232-011-0126-9
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Bibliographic Info

Article provided by Springer in its journal International Review of Economics.

Volume (Year): 59 (2012)
Issue (Month): 3 (September)
Pages: 303-313

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Handle: RePEc:spr:inrvec:v:59:y:2012:i:3:p:303-313

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Web page: http://www.springer.com/economics/journal/12232

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Related research

Keywords: Fiscal policy; Fiscal multiplier; Trade openness; E62; F41;

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References

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  1. Andrew Mountford & Harald Uhlig, 2005. "What are the Effects of Fiscal Policy Shocks?," SFB 649 Discussion Papers SFB649DP2005-039, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  2. Robert E. Hall, 2009. "By How Much Does GDP Rise if the Government Buys More Output?," NBER Working Papers 15496, National Bureau of Economic Research, Inc.
  3. Cogan, John F. & Cwik, Tobias & Taylor, John B. & Wieland, Volker, 2009. "New Keynesian versus old Keynesian government spending multipliers," CEPR Discussion Papers 7236, C.E.P.R. Discussion Papers.
  4. Michael Woodford, 2010. "Simple Analytics of the Government Expenditure Multiplier," Discussion Papers 0910-09, Columbia University, Department of Economics.
  5. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2009. "When is the government spending multiplier large?," NBER Working Papers 15394, National Bureau of Economic Research, Inc.
  6. Robert J. Barro & Charles J. Redlick, 2009. "Macroeconomic Effects from Government Purchases and Taxes," NBER Working Papers 15369, National Bureau of Economic Research, Inc.
  7. 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.
  8. Tommaso Monacelli & Roberto Perotti, 2008. "Openness and the Sectoral Effects of Fiscal Policy," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 395-403, 04-05.
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Cited by:
  1. L. Marattin & A. Palestini, 2010. "Government Spending Under Non-Separability: a Theoretical Analysis," Working Papers wp722, Dipartimento Scienze Economiche, Universita' di Bologna.

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