The Macroeconomic Effects of German Fiscal Austerity under Different Exchange Rate Regimes: The Experience of Central and Eastern European Countries
DOI:
https://doi.org/10.15678/ZNUEK.2016.0957.0902Keywords:
fiscal austerity, Germany, exchange rate regime, Central and Eastern European countries, the Mundell-Fleming modelAbstract
According to a familiar two-country Mundell-Fleming framework, the policy of fiscal austerity in Germany should be restrictionary for other European countries with a floating exchange rate, while there is a possibility of an expansionary effect for countries with a peg. Using quarterly data of eight Central and Eastern European countries over the 2002–2014 period, it is found with a four-variable VAR model that fiscal austerity in Germany leads to an increase in the money supply and output, while the effects on the real exchange rate are marginal. Our results contrast with several other studies, that imply that the policy of fiscal stimulus in Germany is beneficial for other European countries. Our results could be interpreted in such a way that demand and competitiveness effects are outweighed by the effect of international flows. A strongest expansionary effect is obtained for Bulgaria, Slovakia and Latvia, which maintain fixed exchange rates, while expansionary effects are weaker for countries with greater exchange rate flexibility, such as Poland, Hungary and the Czech Republic.
Downloads
References
Auerbach A. J., Gorodnichenko Y. (2012), Measuring the Output Responses to Fiscal Policy, “American Economic Journal: Economic Policy”, vol. 4, no 2, https://doi.org/10.1257/pol.4.2.1.
Beetsma R., Giuliodori M., Klaassen F. (2006), Trade Spillovers of Fiscal Policy in the European Union: A Panel Analysis, “Economic Policy”, vol. 21, no 48, https://doi.org/10.1111/j.1468-0327.2006.00168.x.
Bigio S. (2010), Learning under Fear of Floating, “Journal of Economic Dynamics & Control”, vol. 34, no 10, https://doi.org/10.1016/j.jedc.2010.04.010.
Born B., Juessen B., Müller G. J. (2013), Exchange Rate Regimes and Fiscal Multipliers, “Journal of Economic Dynamics and Control”, vol. 37, no 2, https://doi.org/10.1016/ j.jedc.2012.09.014.
Calvo G., Reinhart C. (2002), Fear of Floating, “Quarterly Journal of Economics”, vol. CXVII, no 2, https://doi.org/10.1162/003355302753650274.
Cardi O., Müller G. J. (2011), Habit Formation and Fiscal Transmission in Open Economies, “Journal of International Economics”, vol. 85, no 2, https://doi.org/10.1016/j.jinteco.2011.07.007.
Christiano L., Eichenbaum M., Rebelo S. (2011), When Is the Government Spending Multiplier Large?, “Journal of Political Economy”, vol. 119, no 1, https://doi.org/10.1086/659312.
Corsetti G., Meier A., Müller G. J. (2012), What Determines Government Spending Multipliers, “Economic Policy”, vol. 27, no 72, https://doi.org/10.1111/j.1468-0327.2012.00295.x.
Ilzetzki, E., Mendoza E., Végh C. (2013), How Big (Small?) Are Fiscal Multipliers?, “Journal of Monetary Economics”, vol. 60, no 2, https://doi.org/10.1016/j.jmoneco.2012.10.011.
Ivanova A., Weber S. (2011), Do Fiscal Spillovers Matter?, “IMF Working Paper”, no WP/11/211.
Johannsen B. (2014), When Are the Effects of Fiscal Policy Uncertainty Large?, “Finance and Economics Discussion Series”, no 2014-40.
Karger H. (2014), The Bitter Pill: Austerity, Debt, and the Attack on Europe’s Welfare States, “Journal of Sociology & Social Welfare”, vol. XLI, no 2.
Krugman P. (2013), Those Depressing Germans, “The New York Times”, November 3.
McCallum B. (1996), International Monetary Economics, Oxford University Press, Oxford, NY.
Müller G. J. (2014), Fiscal Austerity and the Multiplier in Times of Crisis, “German Economic Review”, vol. 15, no 2, https://doi.org/10.1111/geer.12020.
Veld J. (2013), Fiscal Consolidations and Spillovers in the Euro Area Periphery and Core, “European Commission Economic Papers”, no 506.
Windberger T., Crespo Cuaresma J., Walde J. (2012), Dirty Floating and Monetary Independence in Central and Eastern Europe – The Role of Structural Breaks, “University of Innsbruck Working Papers in Economics and Statistics”, no 2012-21.
Zezza G. (2012), The Impact of Fiscal Austerity in the Eurozone, “Review of Keynesian Economics”, Inaugural Issue.
