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Exchange-Rate Regimes and the Effectiveness of Fiscal Policy

Author

Listed:
  • Karras, Georgios

    () (University of Illinois)

Abstract

How does the potency of fiscal policy depend on a country’s exchange-rate regime? The Mundell-Fleming theoretical model predicts that fiscal policy can affect output under both fixed and flexible exchange rates, but that the effect is larger when the exchange rate is fixed. Using a panel data set of 61 countries for the 1951-2007 period, the paper shows that fiscal policy is indeed more potent under fixed exchange rates than under flexible, and that the difference is substantial: the estimated models imply that maintaining a fixed exchange rate raises the long-run fiscal multiplier by roughly a third.

Suggested Citation

  • 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.
  • Handle: RePEc:ris:integr:0528
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    Cited by:

    1. Georgios Karras, 2012. "Trade openness and the effectiveness of fiscal policy: some empirical evidence," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 59(3), pages 303-313, September.

    More about this item

    Keywords

    Fiscal Policy; Fixed or Flexible Exchange Rates;

    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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