Fiscal multipliers

Increased borrowing leads to more foreign investment in government bonds pushing up the exchange rate. The current account deficit that arises is the counterpart of the capital inflows necessary to finance government borrowing



Indeed, recent work by LSE economist Ethan Ilzetzki with two co-researchers from the University of Maryland published by the NBER suggests the following:
  • Fiscal multipliers are zero in countries with flexible exchange rates.
  • Fiscal multipliers are lower in open economies.
  • Fiscal multipliers are zero in high-debt countries.

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