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Do Monetary Handcuffs Restrain Leviathan? Fiscal Policy in Extreme Exchange Rate Regimes

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Fatás, Antonio
Rose, Andrew K

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Abstract

This Paper is an empirical study of fiscal policy in countries with extreme monetary regimes. We study members of multilateral currency unions, dollarized countries that officially use the money of another country, and countries using currency boards. We find that belonging to an international common currency area is not associated with fiscal discipline; if anything, spending and taxes are higher inside currency unions. This effect is especially pronounced for dollarized countries that unilaterally adopt the currency of another country. Currency boards are associated with fiscal restraint.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2692.

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Date of creation: Feb 2001
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Handle: RePEc:cpr:ceprdp:2692

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Related research
Keywords: Budget; Empirical; Government; Panel; Revenue; Spending; Tax;

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Find related papers by JEL classification:
E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
F30 - International Economics - - International Finance - - - General
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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  1. Eichengreen, Barry, 1993. "European Monetary Unification," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1321-57, September. [Downloadable!] (restricted)
  2. Fatas, Antonio & Mihov, Ilian, 2001. "Government size and automatic stabilizers: international and intranational evidence," Journal of International Economics, Elsevier, vol. 55(1), pages 3-28, October. [Downloadable!] (restricted)
    Other versions:
  3. Tornell, Aaron & Velasco, Andres, 2000. "Fixed versus flexible exchange rates: Which provides more fiscal discipline?," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 399-436, April. [Downloadable!] (restricted)
    Other versions:
  4. Barry Eichengreen & Charles Wyplosz, 1998. "The Stability Pact: more than a minor nuisance?," Economic Policy, CEPR, CES, MSH, vol. 13(26), pages 65-113, 04. [Downloadable!] (restricted)
  5. Anne Marie Gulde & Juha Kähkönen & Peter Keller, 2000. "Pros and Cons of Currency Board Arrangements in the Lead-Up to EU Accession and Participation in the Euro Zone," IMF Policy Discussion Papers 00/1, International Monetary Fund.
  6. Rose, Andrew K, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," CEPR Discussion Papers 2329, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  7. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October. [Downloadable!] (restricted)
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  8. Ghosh, Atish R. & Gulde, Anne-Marie & Ostry, Jonathan D. & Wolf, Holger, . "Does the Exchange Regime Matter for Inflation and Growth?," IMF Economic Issues 2, International Monetary Fund. [Downloadable!]
  9. Andrew K. Rose & Charles Engel, 2000. "Currency Unions and International Integration," NBER Working Papers 7872, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Frankel, Jeffrey A & Rose, Andrew K, 2000. "An Estimate of the Effect of Currency Unions on Trade and Output," CEPR Discussion Papers 2631, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Flandreau, Marc & Maurel, Mathilde, 2001. "Monetary Union, Trade Integration, and Business Cycles in 19th Century Europe: Just Do It," CEPR Discussion Papers 3087, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Paul R. Masson & Catherine A. Pattillo, . "Monetary Union in West Africa: An Agency of Restraint for Fiscal Policies," IMF Working Papers 01/34, International Monetary Fund. [Downloadable!]
    Other versions:
  3. Eichengreen, Barry, 2008. "Sui Generis EMU," CEPR Discussion Papers 6642, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Charalambos G. Tsangarides & Pierre Ewenczyk & Michal Hulej, 2006. "Stylized Facts on Bilateral Trade and Currency Unions: Implications for Africa," IMF Working Papers 06/31, International Monetary Fund. [Downloadable!]
  5. Guillermo Tolosa & Rupa Duttagupta, 2006. "Fiscal Discipline and Exchange Rate Regimes: Evidence from the Caribbean," IMF Working Papers 06/119, International Monetary Fund. [Downloadable!]
  6. Yan Sun, 2003. "Do Fixed Exchange Rates Induce More Fiscal Discipline?," IMF Working Papers 03/78, International Monetary Fund. [Downloadable!]
  7. Marc Flandreau & Mathilde Maurel, 2005. "Monetary Union, Trade Integration, and Business Cycles in 19th Century Europe," Open Economies Review, Springer, vol. 16(2), pages 135-152, April. [Downloadable!] (restricted)
  8. Oliver Grimm, 2007. "Fiscal Discipline and Stability under Currency Board Systems," Economics working paper series 07/66, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich. [Downloadable!]
  9. Eduardo Levy Yeyati, 2006. "Exchange Rate Regimes in the 2000s: A Latin American Perspective," Business School Working Papers exchangerate, Universidad Torcuato Di Tella. [Downloadable!]
  10. Järvinen, Marketta, 2002. "Exchange rate regimes and nominal convergence in the CEECs," BOFIT Discussion Papers 4/2002, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  11. Luis Catão & Marco Terrones, 2003. "Fiscal Deficits and Inflation," IMF Working Papers 03/65, International Monetary Fund. [Downloadable!]
    Other versions:
  12. Hefeker, Carsten, 2003. "Fiscal Reform and Monetary Union in West Africa," Discussion Paper Series 26257, Hamburg Institute of International Economics. [Downloadable!]
  13. 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!]
  14. Steven F. Kreft & Elham Mafi-Kreft, 2004. "Importing Credible Monetary Policy: A Way for Transition Economies to Fight Inflation?," Working Papers 2004-17, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
    Other versions:
  15. Dalia Grigonyté, 2003. "Impact of Currency Boards on Fiscal Policy in Central and Eastern European Countries," Economic Change and Restructuring, Springer, vol. 36(2), pages 111-133, June. [Downloadable!] (restricted)
  16. 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:
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