IMF Working Papers

The Effects of Monetary and Fiscal Policy on Aggregate Demand in a Small Open Economy: An Application of the Structural Error Correction Model

By Tetsuya Konuki

October 1, 2000

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Tetsuya Konuki. The Effects of Monetary and Fiscal Policy on Aggregate Demand in a Small Open Economy: An Application of the Structural Error Correction Model, (USA: International Monetary Fund, 2000) accessed November 21, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper empirically analyzes the short-run effects of monetary and fiscal policy on aggregate demand, using the two-step structural error correction method. This method has an advantage over the standard reduced-form error correction method in providing a meaningful interpretation for impulse responses. The results are in sharp contrast to those of the traditional Mundell-Fleming and Dornbusch models: after the monetary (fiscal) policy is relaxed, the home currency depreciates (appreciates) for a substantial period of time, and the aggregate demand first expands (contracts) then gradually returns toward its original path.

Subject: Demand for money, Econometric models, Exchange rates, Fiscal policy, Fiscal stimulus, Foreign exchange, Money, Real exchange rates

Keywords: Aggregate demand, Aggregate demand function, Aggregate demand specification, Aggregate demand to monetary and fiscal policy shock, Demand for money, Equation method, Exchange rates, Expansionary monetary policy shock, Fiscal policy, Fiscal policy disturbance, Fiscal stimulus, GMM estimation, Level of significance, Magnifying depreciation, Monetary and fiscal policy, Money demand shock, Nominal exchange rate, Open economy, Phillips-curve price adjustment equation, Real exchange rates, Structural error correction models, WP

Publication Details

  • Pages:

    24

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2000/165

  • Stock No:

    WPIEA1652000

  • ISBN:

    9781451858044

  • ISSN:

    1018-5941

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