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Mobile Capital, Domestic Institutions, and Electorally Induced Monetary and Fiscal Policy

Published online by Cambridge University Press:  01 August 2014

William Roberts Clark  and
Mark Hallerberg
William Roberts Clark
Affiliation:
New York University
Mark Hallerberg
Affiliation:
University of Pittsburgh
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Abstract

The literature on global integration and national policy autonomy often ignores a central result from open economy macroeconomics: Capital mobility constrains monetary policy when the exchange rate is fixed and fiscal policy when the exchange rate is flexible. Similarly, examinations of the electoral determinants of monetary and fiscal policy typically ignore international pressures altogether. We develop a formal model to analyze the interaction between fiscal and monetary policymakers under various exchange rate regimes and the degrees of central bank independence. We test the model using data from OECD countries. We find evidence that preelectoral monetary expansions occur only when the exchange rate is flexible and central bank independence is low; preelectoral fiscal expansions occur when the exchange rate is fixed. We then explore the implications of our model for arguments that emphasize the partisan sources of macroeconomic policy and for the conduct of fiscal policy after economic and monetary union in Europe.

Type
Articles
Information
American Political Science Review , Volume 94 , Issue 2 , June 2000 , pp. 323 - 346
Copyright
Copyright © American Political Science Association 2000

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