The effects of fiscal policy and external output in an emerging economy open to the outside world
DOI:
https://doi.org/10.29201/peipn.v7i13.309Keywords:
fiscal policy, current account, foreign output, real exchange rateAbstract
The effects of an expansive fiscal policy and an increase in foreign output are similar for the domestic output and the real exchange rate in the short run, However, in the long run an expansive fiscal policy generates a net reduction of the domestic output and a net increase of the real exchange rate, while the increase in foreign output increases even more the domestic output and generates an additional reduction of the real exchange rate. When foreign output falls, a countercyclical fiscal policy may stabilize the domestic output in the short run. In the long run, however, this policy reinforces the recessive effects ofthe original shock.
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