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Exchange rate regimes and fiscal multipliers

  • Born, Benjamin
  • Juessen, Falko
  • Müller, Gernot

Does the fiscal multiplier depend on the exchange rate regime and, if so, how strongly? To address this question, we first estimate a panel vector autoregression (VAR) model on time-series data for OECD countries. We identify the effects of unanticipated government spending shocks in countries with fixed and floating exchange rates, while controlling for anticipated changes in government spending. In a second step, we interpret the evidence through the lens of a New Keynesian small open economy model. Three results stand out. First, while government spending multipliers are larger under fixed exchange rate regimes, the difference relative to floating exchange rates is smaller than what traditional Mundell-Fleming analysis suggests. Second, there is little evidence for the specific transmission channel which is at the heart of the Mundell-Fleming model. Third, the New Keynesian model provides a satisfactory account of the evidence.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8986.

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Date of creation: May 2012
Handle: RePEc:cpr:ceprdp:8986
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