The Macroeconomic Effects of German Fiscal Austerity under Different Exchange Rate Regimes: The Experience of Central and Eastern European Countries

Authors

DOI:

https://doi.org/10.15678/ZNUEK.2016.0957.0902

Keywords:

fiscal austerity, Germany, exchange rate regime, Central and Eastern European countries, the Mundell-Fleming model

Abstract

According to a familiar two-country Mundell-Fleming framework, the policy of fiscal austerity in Germany should be restrictionary for other European countries with a floating exchange rate, while there is a possibility of an expansionary effect for countries with a peg. Using quarterly data of eight Central and Eastern European countries over the 2002–2014 period, it is found with a four-variable VAR model that fiscal austerity in Germany leads to an increase in the money supply and output, while the effects on the real exchange rate are marginal. Our results contrast with several other studies, that imply that the policy of fiscal stimulus in Germany is beneficial for other European countries. Our results could be interpreted in such a way that demand and competitiveness effects are outweighed by the effect of international flows. A strongest expansionary effect is obtained for Bulgaria, Slovakia and Latvia, which maintain fixed exchange rates, while expansionary effects are weaker for countries with greater exchange rate flexibility, such as Poland, Hungary and the Czech Republic.

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17-03-2017

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How to Cite

Shevchuk, V., & Kopych, R. (2017). The Macroeconomic Effects of German Fiscal Austerity under Different Exchange Rate Regimes: The Experience of Central and Eastern European Countries. Krakow Review of Economics and Management Zeszyty Naukowe Uniwersytetu Ekonomicznego W Krakowie, 9(957), 21-40. https://doi.org/10.15678/ZNUEK.2016.0957.0902