pegged exchange rates or otherwise limited monetary policy (See Table A1 and A2 for exchange rate classifications of our sample countries). The five-year baseline fiscal multipliers are reported in Figure 10 . These are the effects of each shock on the level of GDP after five years. The government current primary spending multiplier is estimated at almost zero, meaning that after five years, the cumulative GDP effect of a consolidation through reducing government current primary spending is almost zero. In other words, if the government of this small state cuts
the exchange rate regime is pegged. The sum of the responses to Peg and Δ F show the effects of a consolidation occurring in a pegged exchange rate regime. The response to Δ F shows the effect of a consolidation occurring in a floating regime. The results suggest that the effect of fiscal consolidation on economic activity is more contractionary in pegged exchange rate regimes. A 1 percent of GDP fiscal consolidation reduces real GDP by 0.84 percent ( t -statistic = –4.15) within two years when the exchange rate is pegged, but by only 0.33 percent ( t