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Journal of Economic Integration 2024 March;39(1) :86-106.
DOI: https://doi.org/10.11130/jei.2024002
How US Fiscal and Monetary Policy affect the GDP of Countries with Fixed and Flexible Exchange Rates: Estimates using Korean Data from 1963 to 2022

Jonathan E. Leightner 

Hull College of Business, Augusta University, USA
Corresponding Author: Jonathan E. Leightner ,Email: jleightn@augusta.edu
Copyright ©2024 Journal of Economic Integration
ABSTRACT
The simplest large country IS/LM/BP model (Mundell-Fleming Model) predicts that an increase in Government spending in the US would cause an increase in Gross Domestic Product (GDP) for countries with flexible exchange rate regimes and decreases in GDP for countries with fixed exchange rate regimes. In contrast, increases in the US money supply would cause an increase in GDP for countries with fixed exchange rate regimes and decreases in GDP for countries with flexible exchange rate regimes. This paper uses a solution to the omitted variables problem of regression analysis to estimate the effects of US fiscal and monetary policy on the Republic of Korea using quarterly data. The data splits into two sections: (1) from 1962 through 1997, Korea had a fixed exchange rate regime and (2) from 1998 through 2022, Korea had a flexible exchange rate regime. The empirical results fit the Large Country IS/LM/BP predictions.

JEL Classification
F41: Open Economy Macroeconomics
F42: International Policy Coordination and Transmission
N10: General, International, or Comparative
Keywords: United States | Mundell-Fleming model | policy coordination | South Korea | spill over effects | fixed versus flexible exchange rate systems
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