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The Fiscal Stimulus of 2009-10: Trade Openness, Fiscal Space and Exchange Rate Adjustment

Joshua Aizenman and Yothin Jinjarak

Santa Cruz Department of Economics, Working Paper Series from Department of Economics, UC Santa Cruz

Abstract: This paper studies the cross-country variation of the fiscal stimulus and the exchange rate adjustmentpropagated by the global crisis of 2008-9, identifying the role of economic structure in accounting for theheterogeneity of response. We find that greater de facto fiscal space prior to the global crisis and lowertrade openness were associated with a higher fiscal stimulus/GDP during 2009-2010 (where the de factofiscal space is the inverse of the average tax-years it would take to repay the public debt). Lowering the2006 public debt/average tax base from the level of low-income countries (5.94) down to the averagelevel of the Euro minus the Euro-area peripheral countries (1.97), was associated with a larger crisisstimulus in 2009-11 of 2.78 GDP percentage points. Joint estimation of fiscal stimuli and exchange ratedepreciations indicates that higher trade openness was associated with a smaller fiscal stimulus and ahigher depreciation rate during the crisis. Overall, the results are in line with the predictions of the neo-Keynesian open-economy model.

Keywords: Social and Behavioral Sciences; Fiscal space; fiscal stimulus; trade openness (search for similar items in EconPapers)
Date: 2011-07-25
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Citations: View citations in EconPapers (21)

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