An Accelerator Tied to a Brake: Fiscal Stimulus under a Floating Exchange Rate

This paper examines the widely accepted proposition that the fiscal stimulus saved Australia from the worst effects of the Global Financial Crisis (GFC). It presents theoretical and empirical arguments supporting the view that fiscal stimulus is ineffective in a floating exchange-rate regime. It underlines this by comparing Australia's experiences in the East Asian Crisis of 1997 and the GFC of 2008-09. It concludes that a depreciating exchange rate protected the Australian economy in the 1997 crisis, but was prevented from doing so in the 2008-09 crisis by the fiscal stimulus.