Exchange Rate Regimes and Fiscal Multipliers

40 Pages Posted: 28 Sep 2012

See all articles by Benjamin Born

Benjamin Born

Frankfurt School of Finance & Management

Falko Juessen

University of Dortmund - Department of Economics; IZA Institute of Labor Economics

Gernot J. Müller

University of Tuebingen - Department of Economics

Date Written: May 2012

Abstract

Does the fiscal multiplier depend on the exchange rate regime and, if so, how strongly? To address this question, we first estimate a panel vector autoregression (VAR) model on time-series data for OECD countries. We identify the effects of unanticipated government spending shocks in countries with fixed and floating exchange rates, while controlling for anticipated changes in government spending. In a second step, we interpret the evidence through the lens of a New Keynesian small open economy model. Three results stand out. First, while government spending multipliers are larger under fixed exchange rate regimes, the difference relative to floating exchange rates is smaller than what traditional Mundell-Fleming analysis suggests. Second, there is little evidence for the specific transmission channel which is at the heart of the Mundell-Fleming model. Third, the New Keynesian model provides a satisfactory account of the evidence.

Keywords: exchange rate regimes, fiscal multiplier, fiscal policy, monetary policy, New Keynesian model, Panel VAR

JEL Classification: E62, F41

Suggested Citation

Born, Benjamin and Juessen, Falko and Müller, Gernot J., Exchange Rate Regimes and Fiscal Multipliers (May 2012). CEPR Discussion Paper No. DP8986, Available at SSRN: https://ssrn.com/abstract=2153418

Benjamin Born (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Falko Juessen

University of Dortmund - Department of Economics ( email )

D-44221 Dortmund
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Gernot J. Müller

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

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