Working Paper: NBER ID: w17427
Authors: Joshua Aizenman; Yothin Jinjarak
Abstract: This paper studies the cross-country variation of the fiscal stimulus and the exchange rate adjustment propagated by the global crisis of 2008-9, identifying the role of economic structure in accounting for the heterogeneity of response. We find that greater de facto fiscal space prior to the global crisis and lower trade openness were associated with a higher fiscal stimulus/GDP during 2009-2010 (where the de facto fiscal space is the inverse of the average tax-years it would take to repay the public debt). Lowering the 2006 public debt/average tax base from the level of low-income countries (5.94) down to the average level of the Euro minus the Euro-area peripheral countries (1.97), was associated with a larger crisis stimulus in 2009-11 of 2.78 GDP percentage points. Joint estimation of fiscal stimuli and exchange rate depreciations indicates that higher trade openness was associated with a smaller fiscal stimulus and a higher depreciation rate during the crisis. Overall, the results are in line with the predictions of the neo-Keynesian open-economy model.
Keywords: No keywords provided
JEL Codes: E62; F42; O23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| greater de facto fiscal space prior to the global crisis (H69) | higher fiscal stimulus-to-GDP ratio during 2009-2010 (E62) |
| lower trade openness (F19) | higher fiscal stimulus (E62) |
| lower trade openness (F19) | higher depreciation rate during the crisis (G01) |
| higher fiscal stimulus (E62) | higher depreciation rate during the crisis (G01) |