Economic Openness and Fiscal Multipliers

Marco Riguzzi

Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft

Abstract: This essay examines the implications of openness to trade, capital mobility, and exchange rate flexibility for the fiscal multiplier. It presents a New Open Economy Macroeconomics model which is extended with the formation of "deep habits" by individual households. Hereby, an inter-temporal substitution effect is constituted, which causes monopolistically competitive producers to move their markups counter-cyclically and generates a positive fiscal multiplier of private consumption. The main outcome is a mechanism elaborating that both openness to trade and exchange rate flexibility limit the fiscal multiplier in equilibrium, and that capital mobility increases the fiscal multiplier in the short run. This dynamic model differs in its implications from a static model, such as the Mundell-Fleming model, and it is consistent with recent empirical findings.

Keywords: Fiscal Multiplier; openness to trade; capital mobility; exchange rate flexibility (search for similar items in EconPapers)
JEL-codes: E12 E62 F4 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-int, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Economic Openness and Fiscal Multipliers (2017)
Working Paper: Economic Openness and Fiscal Multipliers (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ube:dpvwib:dp1406

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