The Importance of Composition of Fiscal Policy: Evidence from Different Exchange Rate Regimes

Philip Lane and Roberto Perotti
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Roberto Perotti: Postal: Department of Economics, Trinity College, Dublin 2, Ireland

CEG Working Papers from Trinity College Dublin, Economics Department

Abstract: We study the macroeconomic effects of fiscal policies in an open economy. We emphasize two transmission mechanisms: the cost channel, by which wage government spending and labor taxes raise the real wage firms must pay, and the exchange rate channel, by which the nominal exchange rate shifts induced by fiscal policy have real effects if (some) prices and wage are sticky. The latter channel implies that changes in wage government spending or in labor taxation should have different effects under flexible than under fixed exchange rates. In a 1964-93 panel of OECD countries we find significant evidence for both channels. Moreover, we find that the real product wage and profitability are more responsive than quantities (employment and output) to fiscal policy innovations.

Date: 2001
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Related works:
Journal Article: The importance of composition of fiscal policy: evidence from different exchange rate regimes (2003)
Working Paper: The Importance of Composition of Fiscal Policy: Evidence from Different Exchange Rate Regimes (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:tcd:tcdceg:200111

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