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We study the empirical effects of fiscal policy in Denmark since the adoption of a fixed exchange rate policy in 1982. We demonstrate that fiscal stimulus has a rather large impact on economic activity in the very short run, with a government spending multiplier of 1.3 on impact in our preferred specification. Denmark's fixed exchange rate implies that the nominal interest rate remains fixed after a fiscal expansion, facilitating a substantial impact of the fiscal stimulus on the real economy. On the other hand, the large degree of openness of the Danish economy means that a sizeable share of the fiscal stimulus will be directed towards imported goods. Our results suggest that the 'monetary accomodation channel' dominates the 'leakage effect'. We also find that the effects of fiscal stimulus are very short-lived in Denmark, with the effect on output becoming insignificant after around a year. The fiscal multiplier is above 1 only in the first quarter, and drops to 0.6 one year after the shock. We further demonstrate that the fiscal multiplier is far from constant over time. While the multiplier was below 1 in the 1970's and 1980's, it has been above 1 in the 1990's and the 2000's, when Denmark has had a credibly fixed exchange rate and sound public finances.

The impact on central macroeconomic variables from changes in the monetary-policy regime in the OECD countries in the period 1970-2005 is estimated using the difference-in-difference method. We find that both shifts to a fixed-exchange-rate policy and to inflation targeting have led to a decline in inflation beyond the global trend in the following years. Furthermore, we find a significant reduction in the volatilities in both inflation and output-gap, beyond the global trend, after the adoption of a consistent fixed-exchange-rate policy, while no such effect can be found from a move to inflation targeting. The results are robust to several changes in the classification of the individual countries. In important respects, the results are at odds with recent literature on monetary policy and inflation targeting. This raises some questions: Does the exchange rate in practice absorb or create shocks? Should the role of fiscal policy be reconsidered? Are the concepts of robustness and optimality inadequately mixed? The answers can hopefully be found via future research.