Exchange rate regimes and fiscal discipline: the role of trade openness

Chowdhury, Mohammad T. H., Bhattacharya, Prasad S., Mallick, Debdulal and Ulubasoglu, Mehmet A. 2016, Exchange rate regimes and fiscal discipline: the role of trade openness, International review of economics and finance, vol. 45, pp. 106-128, doi: 10.1016/j.iref.2016.04.013.

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Title Exchange rate regimes and fiscal discipline: the role of trade openness
Author(s) Chowdhury, Mohammad T. H.
Bhattacharya, Prasad S.ORCID iD for Bhattacharya, Prasad S.
Mallick, DebdulalORCID iD for Mallick, Debdulal
Ulubasoglu, Mehmet A.ORCID iD for Ulubasoglu, Mehmet A.
Journal name International review of economics and finance
Volume number 45
Start page 106
End page 128
Total pages 23
Publisher Elsevier
Place of publication Amsterdam, The Netherlands
Publication date 2016-09
ISSN 1059-0560
Keyword(s) Exchange rate regimes
Fiscal discipline
Trade openness
Budget balance
Summary This study revisits the relationship between exchange rate regime (ERR) choice and fiscal discipline focusing on the role of trade openness. The conventional theoretical view is that fixed regimes bring about more fiscal discipline, while the recent literature argues that flexible regimes are more disciplinary. Empirical studies have provided mixed evidence. Using a panel dataset for a large number of developing and developed countries, as well as pooled panel OLS and instrumental variables (IV) estimation techniques, we find support for both views. We document that a fixed ERR is disciplinary at low levels of trade openness, while a flexible regime produces a greater fiscal discipline above a certain level of trade openness. Moreover, this relationship applies to only developing countries. These findings remain robust across different measures of fiscal outcomes, a number of controls, across different sub-samples, and are supported by both annual and five-year averaged panel data.
Language eng
DOI 10.1016/j.iref.2016.04.013
Field of Research 140210 International Economics and International Finance
1402 Applied Economics
1502 Banking, Finance And Investment
Socio Economic Objective 910104 Exchange Rates
HERDC Research category C1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2016, Elsevier
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