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Fiscal Discipline and Exchange Rate Systems

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Author Info
Canzoneri, Matthew B
Cumby, Robert E
Diba, Behzad T

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Abstract

A new "fiscal" theory of price determination has implications for exchange rate systems and common currency areas. We show that deeper monetary integration requires the discipline of a Ricardian regime; that is, the government must guarantee fiscal solvency for any sequence of prices or exchange rates. Particularly striking results are that a currency peg is not credible without the discipline of a Ricardian regime, and a common currency area is not viable if fiscal policy in two (or more) of the countries in the union is Non-Ricardian. Interestingly, constraints written into the Maastricht Treaty are sufficient for a Ricardian regime.

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Publisher Info
Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 111 (2001)
Issue (Month): 474 (October)
Pages: 667-90
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Handle: RePEc:ecj:econjl:v:111:y:2001:i:474:p:667-90

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  1. Barbara Annicchiarico, 2006. "Fiscal Policy and Exchange Rates," Journal of Economics, Springer, vol. 89(2), pages 165-185, November. [Downloadable!] (restricted)
    Other versions:
  2. Philipp Paulus, 2004. "The fiscal stability impact of monetary unions - looking beneath the Stability Pact debate," Otto-Wolff-Institut Discussion Paper Series 05/2004, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland. [Downloadable!]
  3. Robert-Paul Berben & Jan Marc Berk, 2002. "Requirements for successful currency regimes: the Dutch and Thai experiences," MEB Series (discontinued) 2002-16, Netherlands Central Bank, Monetary and Economic Policy Department. [Downloadable!]
  4. António Afonso, 2002. "Disturbing the fiscal theory of the price level: Can it fit the eu-15?," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B4-3, International Conferences on Panel Data. [Downloadable!]
    Other versions:
  5. Østrup, Finn, 2005. "Fiscal Policy and Welfare under Different Exchange Rate Regimes," Working Papers 2005-1, Copenhagen Business School, Department of Finance. [Downloadable!]
  6. Pieter van Foreest & Casper de Vries, 2003. "The Forex Regime and EMU Expansion," Open Economies Review, Springer, vol. 14(3), pages 285-298, July. [Downloadable!] (restricted)
  7. Andrea Ferrero, 2005. "Fiscal and monetary rules for a currency union," Working Paper Series 502, European Central Bank. [Downloadable!]
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  8. Komulainen, Tuomas & Pirttilä, Jukka, 2000. "Fiscal Explanations for Inflation: Any Evidence from Transition Economies?," BOFIT Discussion Papers 11/2000, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
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  9. Ondřej Schneider & Jan Zápal, 2006. "Fiscal Policy in New EU Member States: Go East, Prudent Man!," Post-Communist Economies, Taylor and Francis Journals, vol. 18(2), pages 139-166, June. [Downloadable!] (restricted)
    Other versions:
  10. Marcelo Sánchez, 2008. "Monetary stabilisation in a currency union of small open economies," Working Paper Series 927, European Central Bank. [Downloadable!]
  11. Fritz Breuss, 2002. "Was ECB's monetary policy optimal?," Atlantic Economic Journal, International Atlantic Economic Society, vol. 30(3), pages 298-319, September. [Downloadable!] (restricted)
  12. Barbara Annicchiarico, 2002. "Fiscal Policy And Exchange Rates," Departmental Working Papers 174, Tor Vergata University, CEIS. [Downloadable!]
  13. Fritz Breuss, 0002. "Was ECB's Monetary Policy Optimal?," WIFO Working Papers 173, WIFO. [Downloadable!]
  14. Campbell Leith & Simon Wren-Lewis, . "Interactions Between Monetary and Fiscal Policy under Flexible Exchange Rates," Working Papers 2002_11, Department of Economics, University of Glasgow. [Downloadable!]
    Other versions:
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