Globalization, Exchange Rate, and Government Spending.

Many theoretical and empirical studies support the claim that the institutional settings (e.g. central bank dependence, left government ideology, labor-union pressure and welfare regime) play the crucial role of triggering government spending to respond to the globalization impacts. Unlike most political scientists, I argue that the financial market operation, especially the exchange rate based stabilization (ERBS), determines the timing of the initiation of an expansionary policy. This paper develops a model for discussing the mechanisms of the fiscal and monetary determinants within the financial market and link the model to empirical tests. On the formal side, the exchange rate and government spending relation is similar to the theory created by Mundell (1963). The empirical tests involved in the Generalized Method of Moments (GMM) estimators are developed for intertemporal analysis and for the examination of dynamic models of pooled time-series cross-sectional data that covers eighteen OECD countries from 1973 to 2000.After controlling dynamic endogeneity problem over our analytical variables, our empirical investigation verifies the importance of ERBS rationale and its accompanying monetary factors while dealing with the expansion of government spending issue, as well as challenges the conventional understanding by overstating the institutional influence. ..PAT.-Unpublished Manuscript [ABSTRACT FROM AUTHOR]