Exchange Rate Regimes And Fiscal Performance. Do Fixed Exchange Rate Regimes Generate More Discipline Than Flexible Ones?
AbstractThis paper analyzes the influence of exchange rate regimes on fiscal performance, focusing on the difference between fixed and flexible exchange rates. For these ends, a sample of 83 countries for the 1974-1998 period, the GMM methodology for dynamic proposal panel models proposed by Arellano and Bond (1991) and diverse exchange rate classifications are used. In relation to the latter, this paper discusses recent regime classifications and proposes a new exchange rate classification that permits to cover possible inconsistencies between the commitment of the central bank and its observed behavior. The results suggest that the influence of regimes on fiscal performance depend on the international context, specifically the possibility of indebtedness and of the characteristics of the international finance system –integration, volatility and dominant financial structure-. In other words, it depends on credit availability as well as on the conditions or potential sanctioning of the finance system. It is found that in situations in which there is no original fiscal discipline and the authorities have the possibility of financing with debt of relatively low cost, fixed regimes do not purvey per se greater fiscal discipline than the flexible ones. On the contrary, flexible ones generate more discipline. In contexts with strong financing restrictions, the discipline’s effects of both regimes are not substantially different. While in situations with abundance of capitals but where they are highly integrated, they are volatile and possibly subject to contagion effect. The same functioning of the international finance system can, through their potential sanction, achieve greater discipline in economies with fixed regimes that wish to stay as such.
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Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society 2004 North American Winter Meetings with number 474.
Date of creation: 11 Aug 2004
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exchange rate regimes; expenditure; revenues; deficits; international finance system; panel data; internal instruments; GMM;
Find related papers by JEL classification:
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- H6 - Public Economics - - National Budget, Deficit, and Debt
- F3 - International Economics - - International Finance
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-12-02 (All new papers)
- NEP-IFN-2004-12-02 (International Finance)
- NEP-PBE-2004-12-02 (Public Economics)
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