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

journal contribution
posted on 01.09.2016, 00:00 authored by Mohammad Chowdhury, Prasad BhattacharyaPrasad Bhattacharya, Debdulal MallickDebdulal Mallick, Mehmet UlubasogluMehmet Ulubasoglu
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.

History

Journal

International review of economics and finance

Volume

45

Pagination

106 - 128

Publisher

Elsevier

Location

Amsterdam, The Netherlands

ISSN

1059-0560

Language

eng

Publication classification

C Journal article; C1 Refereed article in a scholarly journal

Copyright notice

2016, Elsevier