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Exchange-Rate Regimes and the Effectiveness of Fiscal Policy

Georgios Karras
Journal of Economic Integration
Vol. 26, No. 1 (March 2011), pp. 29-44
Stable URL: http://www.jstor.org/stable/23000907
Page Count: 16
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Exchange-Rate Regimes and the Effectiveness of Fiscal Policy
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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.

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