Exchange-Rate Regimes and the Effectiveness of Fiscal Policy

Georgios Karras

Journal of Economic Integration, 2011, vol. 26, 29-44

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.

Keywords: Fiscal Policy; Fixed or Flexible Exchange Rates (search for similar items in EconPapers)
JEL-codes: E62 F41 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:integr:0528

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