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Exchange rate regimes and fiscal discipline: the role of trade openness
journal contribution
posted on 2016-09-01, 00:00 authored by Mohammad Chowdhury, Prasad BhattacharyaPrasad Bhattacharya, Debdulal MallickDebdulal Mallick, Mehmet UlubasogluMehmet UlubasogluThis 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.
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Journal
International review of economics and financeVolume
45Pagination
106 - 128Publisher
ElsevierLocation
Amsterdam, The NetherlandsPublisher DOI
ISSN
1059-0560Language
engPublication classification
C Journal article; C1 Refereed article in a scholarly journalCopyright notice
2016, ElsevierUsage metrics
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