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.
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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
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