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New Zealand: The Last Bastion of Textbook Open-Economy Macroeconomics

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  • David Fielding

    ()
    (Department of Economics, University of Otago)

Abstract

Recent 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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File URL: http://www.business.otago.ac.nz/econ/research/discussionpapers/DP_1105.pdf
File Function: This version, 2011
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Bibliographic Info

Paper provided by University of Otago, Department of Economics in its series Working Papers with number 1105.

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Length: 37 pages
Date of creation: Jun 2011
Date of revision: Jun 2011
Handle: RePEc:otg:wpaper:1105

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Related research

Keywords: Government purchases; Real exchange rate; VAR model;

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References

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  1. King, Michael R. & Segal, Dan, 2008. "Market segmentation and equity valuation: Comparing Canada and the United States," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(3), pages 245-258, July.
  2. Robert Kollmann, 2010. "Government Purchases and the Real Exchange Rate," Open Economies Review, Springer, vol. 21(1), pages 49-64, February.
  3. Morten O. Ravn & Stephanie Schmitt-Grohé & Martín Uribe, 2007. "Explaining the Effects of Government Spending Shocks on Consumption and the Real Exchange Rate," NBER Working Papers 13328, National Bureau of Economic Research, Inc.
  4. Buckle, Robert A. & Kim, Kunhong & Kirkham, Heather & McLellan, Nathan & Sharma, Jarad, 2007. "A structural VAR business cycle model for a volatile small open economy," Economic Modelling, Elsevier, vol. 24(6), pages 990-1017, November.
  5. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.
  6. Anthony Garratt & Kevin Lee & M. Hashem Pesaran & Yongcheol Shin, 2003. "A Long run structural macroeconometric model of the UK," Economic Journal, Royal Economic Society, vol. 113(487), pages 412-455, 04.
  7. Enders, Zeno & Müller, Gernot J. & Scholl, Almuth, 2011. "How do fiscal and technology shocks affect real exchange rates?: New evidence for the United States," Journal of International Economics, Elsevier, vol. 83(1), pages 53-69, January.
  8. Michael Ehrmann & Marcel Fratzscher, 2006. "Global Financial Transmission of Monetary Policy Shocks," CESifo Working Paper Series 1710, CESifo Group Munich.
  9. Karel Mertens & MortenO. Ravn, 2010. "Measuring the Impact of Fiscal Policy in the Face of Anticipation: A Structural VAR Approach," Economic Journal, Royal Economic Society, vol. 120(544), pages 393-413, 05.
  10. Friedrich Heinemann, 2001. "After the death of inflation: will fiscal drag survive?," Fiscal Studies, Institute for Fiscal Studies, vol. 22(4), pages 527-546., December.
  11. Dekker, Arie & Sen, Kunal & Young, Martin R., 2001. "Equity market linkages in the Asia Pacific region: A comparison of the orthogonalised and generalised VAR approaches," Global Finance Journal, Elsevier, vol. 12(1), pages 1-33.
  12. Iris Claus & Aaron Gill & Boram Lee & Nathan McLellan, 2006. "An empirical investigation of fiscal policy in New Zealand," Treasury Working Paper Series 06/08, New Zealand Treasury.
  13. Mardi Dungey & Renee Fry, 2007. "The Identification Of Fiscal And Monetary Policy In A Structural Var," CAMA Working Papers 2007-29, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
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