Fiscal Multipliers in a Financially Globalized World

This paper establishes a relationship between levels of dollariza- tion and the effectiveness of fiscal stimulus. We show that low dollarized economies experience an appreciation of currency from an increase in fiscal stimulus this causes a positive wealth effect leading to an increase in output. In contrast, highly dollarized economies experience a negative response of output in response to increases in government spending. This suggests that fear of fu- ture depreciation of currency in highly dollarized economies stifles the response in output from fiscal stimulus.