New Zealand: The Last Bastion of Textbook Open-Economy Macroeconomics
AbstractRecent empirical research into the macroeconomic effects of fiscal policy shocks has generated a 'puzzle'. Both Keynesian and Real Business Cycle models predict that a fiscal expansion will lead to a real exchange rate appreciation. However, in almost all the countries that have been studied, positive shocks to government spending cause the real exchange rate to depreciate. Recent theoretical work suggests that this unexpected result might reflect incomplete international financial market integration. The country where the incomplete markets assumption is least plausible is New Zealand, because of its integration into the Australian financial system. We show that in New Zealand there is no puzzle, and the standard textbook result still holds. Our counterfactual results are consistent with the argument that the puzzle is to be explained by an absence of complete international financial market integration in most parts of the world.
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Bibliographic InfoPaper provided by University of Otago, Department of Economics in its series Working Papers with number 1105.
Length: 37 pages
Date of creation: Jun 2011
Date of revision: Jun 2011
Government purchases; Real exchange rate; VAR model;
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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