Economic theory predicts that trade and financial openness reduce the fiscal multiplier. This paper tests these predictions using two panel data sets (1) from the period 1983–2011 for a sample of 72 developed and developing countries, and (2) from the period 1971–2011 for a sample of 51 developed and developing countries. The evidence shows that fiscal policy is indeed less effective for countries with greater trade or financial openness. The empirical estimates suggest that a 10% increase in trade openness reduces on average the long-run fiscal multiplier by 7–9%. Financial openness, on the other hand, has a less precise effect on the size of the fiscal multiplier.
|School:||University of Illinois at Chicago|
|School Location:||United States -- Illinois|
|Source:||DAI-A 78/07(E), Dissertation Abstracts International|
|Keywords:||Financial integration, Fiscal multiplier, Fiscal policy, Trade openness|
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