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Exchange-rate management viewed as tax policies

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  • Frenkel, Jacob A.
  • Razin, Assaf

Abstract

The paper develops an analytical framework which demonstrates that the various forms of exchange-rate management are equivalent to corresponding tax policies. To highlight the salient issues, we consider two specific categories of exchange-rate policies. The first is a dual exchange-rate regime, which separates exchange rates for commercial and for financial transactions, and the second is a unified exchange-rate system in which the country unilaterally pegs its exchange rate at the same rate for all transactions. We show that the dual exchange rate policies can be usefully cast as distortionary taxes on international borrowing, and a unified pegged exchange-rate policies can be usefully cast as lump-sum tax cum subsidy policies. The equivalence between the various characteristics of exchange-rate management and tax management suggests that exchange-rate analysis could be usefully incorporated into the broader framework of the analysis of fiscal policies. A two-country model of the world economy is used to demonstrate the international transmission mechanism of these policies.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 33 (1989)
Issue (Month): 4 (April)
Pages: 761-781

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Handle: RePEc:eee:eecrev:v:33:y:1989:i:4:p:761-781

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References

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  1. Adams, Charles & Greenwood, Jeremy, 1985. "Dual exchange rate systems and capital controls: An investigation," Journal of International Economics, Elsevier, vol. 18(1-2), pages 43-63, February.
  2. Greenwood, Jeremy, 1983. "Expectations, the exchange rate, and the current account," Journal of Monetary Economics, Elsevier, vol. 12(4), pages 543-569, November.
  3. Persson, Torsten, 1984. "Real transfers in fixed exchange rate systems and the international adjustment mechanism," Journal of Monetary Economics, Elsevier, vol. 13(3), pages 349-369, May.
  4. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Scholarly Articles 3445091, Harvard University Department of Economics.
  5. Joshua Aizenman, 1986. "On the Complementarity of Commercial Policy, Capital Controls and Inflation Tax," NBER Working Papers 1583, National Bureau of Economic Research, Inc.
  6. Alan C. Stockman, 1978. "A Theory of Exchange Rate Determination," UCLA Economics Working Papers 113, UCLA Department of Economics.
  7. Stockman, Alan C & Hernandez D, Alejandro, 1988. "Exchange Controls, Capital Controls, and International Financial Markets," American Economic Review, American Economic Association, vol. 78(3), pages 362-74, June.
  8. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-94, June.
  9. Maurice Obstfeld, 1986. "Capital Controls, The Dual Exchange Rate, and Devaluation," NBER Working Papers 1324, National Bureau of Economic Research, Inc.
  10. Rudiger Dornbusch, 1986. "Special Exchange Rates for Capital Account Transactions," NBER Working Papers 1659, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Huizinga, Harry, 1997. "Real exchange rate misalignment and redistribution," European Economic Review, Elsevier, vol. 41(2), pages 259-277, February.
  2. Huizinga, H.P., 1996. "The Taxation Implicit in Two-Tiered Exchange Rate Systems," Discussion Paper 1996-100, Tilburg University, Center for Economic Research.
  3. Paul Reding & Jean-Marie Viaene, 1995. "Capital controls and international trade finance in a dual exchange rate regime: The Belgian experience post-mortem," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 131(1), pages 1-27, March.
  4. B. Gabriela Mundaca & Jon Strand, 2004. "A Risk Allocation Approach to Optimal Exchange Rate Policy," CESifo Working Paper Series 1361, CESifo Group Munich.
  5. Canzoneri, M. & Rogers, C., 1989. "Is the European Community an Optimal Currency Area? : Optimal Tax Smoothing versus the Cost of Multiple Currencies," Discussion Paper 1989-23, Tilburg University, Center for Economic Research.
  6. Cécile Daubrée & Jean-Paul Azam, 1991. "La détermination des taux de change parallèles en Afrique : modèle macro-économique et test économétrique (Nigeria, Zaïre, Ghana)," Économie et Prévision, Programme National Persée, vol. 97(1), pages 105-115.
  7. Windt, P.C. van der & Schaling, E. & Huizinga, H.P., 2007. "Capital Controls and Foreign Investor Subsidies Implicit in South Africa's Dual Exchange Rate System," Discussion Paper 2007-91, Tilburg University, Center for Economic Research.

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