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The Fiscal Stimulus of 2009-10: Trade Openness, Fiscal Space and Exchange Rate Adjustment

Aizenman, Joshua; Jinjarak, Yothin

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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, indentifying 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.

Citation

Aizenman, J., & Jinjarak, Y. (2012). The Fiscal Stimulus of 2009-10: Trade Openness, Fiscal Space and Exchange Rate Adjustment. NBER International Seminar on Macroeconomics, 2011, 301-342. https://doi.org/10.1086/663626

Journal Article Type Article
Publication Date Jan 1, 2012
Deposit Date Aug 8, 2011
Publicly Available Date Jan 24, 2025
Journal NBER International Seminar on Macroeconomics
Print ISSN 1932-8796
Electronic ISSN 2150-8372
Publisher MIT Press
Peer Reviewed Peer Reviewed
Volume 2011
Pages 301-342
DOI https://doi.org/10.1086/663626

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