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

  • David Fielding

    ()

    (Department of Economics, University of Otago)

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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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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  1. 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.
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  10. Kollmann, Robert, 2009. "Government Purchases and the Real Exchange Rate," CEPR Discussion Papers 7427, C.E.P.R. Discussion Papers.
  11. Ravn, Morten O & Schmitt-Grohé, Stephanie & Uribe, Martín, 2007. "Explaining the Effects of Government Spending Shocks on Consumption and the Real Exchange Rate," CEPR Discussion Papers 6541, C.E.P.R. Discussion Papers.
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  14. 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.
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