Economic theory suggests that the way government finances its expenditure determines the effectiveness of fiscal expansionary policy. This paper considers a simple investment model embedded in a Markov regime-switching framework, where parameters are subject to shift between two regimes: crowding-in and crowding-out (of private investment by government investment). Using Taiwanese data, the study finds dominant crowding-in effects before 1980, and dominant crowding-out effects after 1980. The dating correctly separates two exchange rate regimes (a fixed, then a flexible rate regime). One conclusion is that fiscal policy is ineffective in a flexible-rate regime.
展开▼
