New Zealand, Australia, and most other economies are small open economies. Any expansion in the budget deficit will drive up the exchange rate because of the higher interest rates. This appreciation of the local currency in response to the capital inflow will make imports cheaper. Any increase in so-called aggregate demand will simply result in an decrease in net exports. There will be no increase in local production or employment.
- a fiscal expansion puts upward pressure on the domestic interest rate
- But this immediately invites a massive capital inflow.
- This appreciates the nominal exchange rate.
- This will decrease net exports, since we are able to import more goods and services with less money because of the currency appreciation, while foreigners will import less of our products because of our appreciated domestic currency
- The exchange rate appreciates and the trade balance worsens until the initial increase in government spending is completely offset.
Under a floating exchange rate and high capital mobility, fiscal policy is ineffective in stimulating the economy because of exchange rate crowding out. The appreciating exchange rate will increase imports and reduce exports to render fiscal policy impotent or at least to shadow of its former closed economies self.
Utopia, you are standing in it! 
Jul 04, 2014 @ 12:34:42
A couple of rookie mistakes.
If there is a depression world wide or a GFC then most countries are doing this.
Interest rates do not immediately move up and even when they do exchange rates sometimes rise and sometimes do not.
Domestic demand is much larger then net exports.
You are ignoring what other counties are doing. Given you use fiscal policy usually only when there is a liquidity trap interest rates rise a lot lot slower.
Empirical evidence shows your theory is wrong!
If fiscal policy didn’t work no country would use fiscal policy!
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Jul 04, 2014 @ 21:33:36
see the substantive post I have written in response to your comments
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