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Effects of Fiscal Contractions: The Importance of Preceding Exchange Rate Movements

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  • Hjelm, Goran
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    Abstract

    We examine the importance of exchange rate and money supply movements for the macroeconomic outcome of fiscal contractions and find: (i) contractions associated with a favorable macroeconomic outcome have been preceded by significantly higher real depreciations as compared to contractions associated with a less favorable macroeconomic outcome and (ii) contractions preceded by real depreciations improve expectations about future income and generate higher private consumption growth. We discuss policy implications for countries both outside and inside the EMU. Copyright 2002 by The editors of the Scandinavian Journal of Economics.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

    Volume (Year): 104 (2002)
    Issue (Month): 3 (September)
    Pages: 423-41

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    Handle: RePEc:bla:scandj:v:104:y:2002:i:3:p:423-41

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    Web page: http://onlinelibrary.wiley.com/journal/10.1111/(ISSN)1467-9442

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    Cited by:
    1. Hjelm, Göran, 2004. "When Are Fiscal Contractions Successful? Lessons for Countries Within and Outside the EMU," Working Paper 92, National Institute of Economic Research.
    2. Salvador Barrios & Sven Langedijk & Lucio Pench, 2010. "EU fiscal consolidation after the financial crisis. Lessons from past experiences," European Economy - Economic Papers 418, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
    3. Schclarek, Alfredo, 2007. "Fiscal policy and private consumption in industrial and developing countries," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 912-939, December.
    4. Benedict J. Clements & Sanjeev Gupta & Erwin Tiongson & Emanuele Baldacci, 2003. "What Sustains Fiscal Consolidations in Emerging Market Countries?," IMF Working Papers 03/224, International Monetary Fund.
    5. Baldacci, Emanuele & Hillman, Arye L. & Kojo, Naoko C., 2004. "Growth, governance, and fiscal policy transmission channels in low-income countries," European Journal of Political Economy, Elsevier, vol. 20(3), pages 517-549, September.
    6. Johansson, Martin & Jönsson, Kristian, 2003. "Public debt and the effects of government expenditure on private consumption - A Kalman filter analysis of the Swedish experience 1970-1997," Working Papers 2003:3, Lund University, Department of Economics.
    7. Alfredo Schclarek, 2004. "Consumption and Keynesian Fiscal Policy," CESifo Working Paper Series 1310, CESifo Group Munich.
    8. Mati, Amine & Thornton, John, 2008. "The exchange rate and fiscal consolidation episodes in emerging market economies," Economics Letters, Elsevier, vol. 100(1), pages 115-118, July.

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