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Fiscal Policy, Expectations, and Exchange-Rate Dynamics

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  • Levin, Jay H

Abstract

This paper uses the sticky-price monetary model to analyze the effects of fiscal policy on the exchange rate under alternative assumptions about exchange-rate expectations. The use of different expectations mechanisms--specifically the perfect-foresight model and the popular models tested by Frankel and Froot: regressive, adaptive, and distributed-lag--is based on recent empirical evidence suggesting that exchange-rate expectations may not be rational. The most surprising finding in the paper is that with adaptive and distributed-lag expectations, fiscal expansion has no initial impact on the exchange rate, and the same may be true for regressive expectations. Copyright 1994 by Blackwell Publishing Ltd.

Suggested Citation

  • Levin, Jay H, 1994. "Fiscal Policy, Expectations, and Exchange-Rate Dynamics," Review of International Economics, Wiley Blackwell, vol. 2(1), pages 50-61, February.
    • Handle: RePEc:bla:reviec:v:2:y:1994:i:1:p:50-61
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