Fiscal Consolidations under Fixed Exchange Rates
AbstractWe present the “fixed exchange rate” version of the Obstfeld and Rogoff model and analyze the international transmission of fiscal policy shocks. It is shown that the welfare effects of an unanticipated contraction in government expenditure in the home country crucially depend on the way in which world money stock is set. If home authorities alone are responsible for pegging the exchange rate, a fiscal adjustment induces a decrease in the real interest rate, stimulates private consumption and limits the contraction in world output, compared with a situation in which a cooperative scheme is implemented. The model is then used to propose a new interpretation of recent events in the EU countries that have enacted restrictive fiscal policies while pegging their currencies to the DM.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 336.
Date of creation: Oct 1998
Date of revision:
exchange rate; social welfare; fiscal policy;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Perotti, Roberto & Alesina, Alberto, 1997. "The Welfare State and Competitiveness," Scholarly Articles 4553027, Harvard University Department of Economics.
- Cipollone Piero & Marchetti Domenico J., 1998. "Strozzature settoriali, limiti alla crescita e pressioni inflazionistiche," Rivista italiana degli economisti, Società editrice il Mulino, issue 1, pages 27-54.
- Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
- Kollmann, R., 1996. "The exchange rate in a dynamic-optimizing current account model with nominal rigidities," Discussion Paper 1996-67, Tilburg University, Center for Economic Research.
- Lane, Philip R., 2001.
"The new open economy macroeconomics: a survey,"
Journal of International Economics,
Elsevier, vol. 54(2), pages 235-266, August.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.