Economic Openness and Fiscal Multipliers

Marco Riguzzi and Philipp Wegmueller

Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft

Abstract: Recent empirical findings attribute a central role to the degree of economic openness to determine the size of the fiscal multiplier. See for instance Ilzetzki, Mendoza & V gh (2013). However, traditional macroeconomic models have difficulties to account for this evidence. By introducing deep-habit formation into a New Keynesian small open economy model, this paper provides a theoretical framework which is able to attest for the new empirical evidence. Deep habits give rise to counter-cyclical firm markups, which are crucial to generate effects of openness on the fiscal multiplier as found in the data. We study three dimensions of economic openness: Exchange rate flexibility, trade openness and capital mobility. In line with the empirical findings, we report a negative relationship between measures of economic openness and the fiscal multiplier.

Keywords: Deep habits; fiscal multiplier; exchange rate flexibility; openness to trade (search for similar items in EconPapers)
JEL-codes: E12 E62 F4 (search for similar items in EconPapers)
Date: 2015-04
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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 (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ube:dpvwib:dp1504

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