Exchange rate regimes and fiscal discipline: The role of trade openness

Mohammad Tarequl Chowdhury, Prasad Bhattacharya, Debdulal Mallick and Mehmet Ulubasoglu

International Review of Economics & Finance, 2016, vol. 45, issue C, 106-128

Abstract: This study revisits the relationship between exchange rate regime (ERR) choice and fiscal discipline focusing on the role of trade openness. The conventional theoretical view is that fixed regimes bring about more fiscal discipline, while the recent literature argues that flexible regimes are more disciplinary. Empirical studies have provided mixed evidence. Using a panel dataset for a large number of developing and developed countries, as well as pooled panel OLS and instrumental variables (IV) estimation techniques, we find support for both views. We document that a fixed ERR is disciplinary at low levels of trade openness, while a flexible regime produces a greater fiscal discipline above a certain level of trade openness. Moreover, this relationship applies to only developing countries. These findings remain robust across different measures of fiscal outcomes, a number of controls, across different sub-samples, and are supported by both annual and five-year averaged panel data.

Keywords: Exchange rate regimes; Fiscal discipline; Trade openness; Budget balance (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:45:y:2016:i:c:p:106-128

DOI: 10.1016/j.iref.2016.04.013

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