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The Fiscal Stimulus of 2009-10: Trade Openness, Fiscal Space and Exchange Rate Adjustment

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  • Aizenman, Joshua
  • Jinjarak, Yothin

Abstract

This paper studies the cross-country variation of the fiscal stimulus and the exchange rate adjustmentpropagated by the global crisis of 2008-9, identifying the role of economic structure in accounting for theheterogeneity of response. We find that greater de facto fiscal space prior to the global crisis and lowertrade openness were associated with a higher fiscal stimulus/GDP during 2009-2010 (where the de factofiscal space is the inverse of the average tax-years it would take to repay the public debt). Lowering the2006 public debt/average tax base from the level of low-income countries (5.94) down to the averagelevel of the Euro minus the Euro-area peripheral countries (1.97), was associated with a larger crisisstimulus in 2009-11 of 2.78 GDP percentage points. Joint estimation of fiscal stimuli and exchange ratedepreciations indicates that higher trade openness was associated with a smaller fiscal stimulus and ahigher depreciation rate during the crisis. Overall, the results are in line with the predictions of the neo-Keynesian open-economy model.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt1vm5d1p4.

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Date of creation: 25 Jul 2011
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Handle: RePEc:cdl:ucscec:qt1vm5d1p4

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Keywords: Social and Behavioral Sciences; Fiscal space; fiscal stimulus; trade openness;

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References

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  1. Besley, Timothy J. & Persson, Torsten, 2007. "The Origins of State Capacity: Property Rights, Taxation, and Politics," CEPR Discussion Papers 6370, C.E.P.R. Discussion Papers.
  2. Aizenman, Joshua & Hutchison, Michael & Jinjarak, Yothin, 2013. "What is the risk of European sovereign debt defaults? Fiscal space, CDS spreads and market pricing of risk," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 37-59.
  3. Ethan Ilzetzki & Enrique G. Mendoza & Carlos A. Végh, 2010. "How Big (Small?) are Fiscal Multipliers?," CEP Discussion Papers dp1016, Centre for Economic Performance, LSE.
  4. Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2004. "When it rains, it pours: Procyclical capital flows and macroeconomic policies," MPRA Paper 13883, University Library of Munich, Germany.
  5. Aizenman, Joshua & Pasricha, Gurnain Kaur, 2010. "Fiscal fragility: what the past may say about the future," Santa Cruz Department of Economics, Working Paper Series qt7mf244m2, Department of Economics, UC Santa Cruz.
  6. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
  7. repec:ese:emodwp:em2-10 is not listed on IDEAS
  8. Andrei Shleifer & Florencio Lopez-de-Silanes & Rafael La Porta, 2008. "The Economic Consequences of Legal Origins," Journal of Economic Literature, American Economic Association, vol. 46(2), pages 285-332, June.
  9. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  10. Mathias Dolls & Clemens Fuest & Andreas Peichl, 2010. "Automatic Stabilizers and Economic Crisis: US vs. Europe," Cologne Graduate School Working Paper Series 01-02, Cologne Graduate School in Management, Economics and Social Sciences.
  11. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  12. Lawrence J. Christiano & Martin Eichenbaum & Sergio Rebelo, 2010. "When is the government spending multiplier large?," CQER Working Paper 2010-01, Federal Reserve Bank of Atlanta.
  13. Robert J. Barro & Charles J. Redlick, 2009. "Macroeconomic Effects from Government Purchases and Taxes," NBER Working Papers 15369, National Bureau of Economic Research, Inc.
  14. Joshua Aizenman & Yothin Jinjarak, 2009. "Globalisation and Developing Countries - a Shrinking Tax Base?," Journal of Development Studies, Taylor & Francis Journals, vol. 45(5), pages 653-671.
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Cited by:
  1. Joshua Aizenman & Yothin Jinjarak, 2012. "Income inequality, tax base and sovereign spreads," NBER Working Papers 18176, National Bureau of Economic Research, Inc.
  2. Paulo R. Mota & Abel L. Costa Fernandes & Ana-Cristina Nicolescu, 2012. "The Recent Dynamics of Public Debt in the European Union: A Matter of Fundamentals or the Result of a Failed Monetary Experiment?," FEP Working Papers 467, Universidade do Porto, Faculdade de Economia do Porto.
  3. Dolls, Mathias & Peichl, Andreas & Zimmermann, Klaus F., 2011. "Eine Herausforderung für die G20: Global vereinbarte Schuldenbremsen und transnationale fiskalpolitische Aufsichtsgremien," IZA Standpunkte 45, Institute for the Study of Labor (IZA).

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