Fiscal cuts under fixed rates boost consumption and limit global downturn.
The article explores how fiscal policy changes affect countries with fixed exchange rates. When a country reduces government spending unexpectedly, it can lower interest rates, boost private spending, and lessen the impact on global output. This is especially true when the country manages its exchange rate alone, rather than in cooperation with others. The study suggests that recent EU countries with tight fiscal policies and fixed currencies to the German Mark may have experienced similar effects.