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The macroeconomic effects of monetary and fiscal policy in a small open economy: Does the exchange rate regime matter?

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  • Darius, Reginald

Abstract

This paper develops a small open economy model in the spirit of Obstfeld and Rogoff (1995). The introduction of endogenous traded sector output unlocks current account and real exchange rate effects. Within this framework where specific consideration is given to the case with fixed but adjustable parities, exchange rate devaluation generates similar qualitative effects as a money supply expansion under floating rates. Output and external effects of government spending shocks are broadly consistent with the adjusted basic non-micro founded Mundell and Fleming (MF) framework, but differ in significant ways from the baseline MF model. Contrary to the textbook MF model a government expenditure shock depreciates the nominal exchange rate and generates real effects under the fixed rate system.

Suggested Citation

  • Darius, Reginald, 2010. "The macroeconomic effects of monetary and fiscal policy in a small open economy: Does the exchange rate regime matter?," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1508-1528, December.
    • Handle: RePEc:eee:jimfin:v:29:y:2010:i:8:p:1508-1528
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    4. Cheikh Tidiane Ndiaye & Mamadou Abdoulaye Konte, 2012. "Incertitude de l'inflation et croissance économique : le cas de l'UEMOA," Working Papers halshs-00828156, HAL.

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