Globalization and fiscal policy plays a significant role in stabilizing the output of capital mobility and exchange rate system. Fiscal policy is quite unlike the traditional monetary system. A truly flexible exchange rate system is barely experienced by the economic sector of many countries.
The concept of the fiscal policy stabilizing the output of capital mobility and exchange rate system has been formulated by the Mundell-Fleming open economy model. Fiscal policy is defined as the system by which the federal government uses its annual budget to deal with the economic activities, allotment of the assets, and distribution of income. Fiscal policy is used by the government of every country with the aim to influence the total demand level in the economy of the country, to attain economical objectives in the steadiness of price sector, and lastly ensure full employment for the majority of individuals that will boost the economic growth.
This budget strategy of fiscal policy affects to a great extent, the government's aim to stimulate internal and external balance in the financial sector and uplift the economic growth thereafter. Fiscal policy possesses 2 devices, viz., payments made by the government and tax revenue. Fiscal policy can operate under 3 possible positions. These 3 positions of fiscal policy include the neutral form, expansion form, and contraction form.
Rodrik, another researcher on the globalization and fiscal policy found in 1998, that there is a strong bond existing between the openness in trade and the size of government, which implies that the disbursement of government contributes largely in reducing the risk rate in open economy of every country. Globalization on fiscal policy had great impacts in terms of trade and capital inflows which has micro-economic significance. There is a big gap between the income level of high-profile skilled workers and labor class who are not so highly skilled. This difference puts huge demands on the fiscal policy in 2 aspects; first in the form of social insurance in short-term policies and second as the investment made by public in academic sector in the long-term policies. Public investment on infrastructure is an important attribute in the developing countries for attracting the attention of foreign direct investment and entry in to the global market.
The financial aspects of globalization during the 1990s characterize the fact that the developing countries underwent an upsurge of private capital inflows and these inflows were highly volatile. The 1970 fiscal policy of the developing countries defines that the exchange rate system of the countries mostly centralized around single or a bulk of major currencies, whereas the 1980s and 1990s witnessed a much more flexible exchange rate system. This is known to be one of the most marked developments caused by globalization on fiscal policies of various countries. The large financial markets such as the United States, Japan, and the New European Monetary Union witnessed less flexible exchange rate system as has been stated by the fiscal policy of 1980s and 1990s.
Globalization and fiscal policy had always played a very influential role in the financial system of many countries. Globalization of the fiscal policy, especially that of the developing countries, has been immensely beneficial especially the formulation of a revised and flexible form of the exchange rate system.
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