Economic Openness and Fiscal Multipliers*. Issue 1 (2nd January 2017)

• Record Type: Journal Article
• Authors: Riguzzi, Marco; Wegmueller, Philipp
• Is Part Of: International economic journal. Volume 31:Issue 1(2017)
• Page Start: 1
• Page End: 35
• Publication Date: 2017-01-02
• Subjects: Deep habits -- fiscal multiplier -- exchange rate flexibility -- openness to trade -- capitalmobility; Economics -- Periodicals; International economic relations -- Periodicals; Korea (South) -- Economic conditions -- 1960- -- Periodicals; 337
• DOI: 10.1080/10168737.2016.1204337
• Languages: English
• ISSNs: 1016-8737

Abstract

ABSTRACT: Recent empirical findings attribute a central role to the degree of economic openness to determine the size of the fiscal multiplier. See, for instance, Ilzetzki et al. (2013) [How big (small?) are fiscal multipliers? Journal of Monetary Economics, 60 (2), 239–254]. However, traditional macroeconomic models have difficulties to account for this evidence. By introducing 'deep-habit' formation into a New Keynesian small open economy model, this paper provides a theoretical framework which is able to attest for the new empirical evidence. Deep habits give rise to counter-cyclical firm markups, which are crucial to generate effects of openness on the fiscal multiplier as found in the data. We study three dimensions of economic openness: exchange rate flexibility, trade openness, and capital mobility. In line with the empirical findings, we report a negative relationship between measures of economic openness and the fiscal multiplier.