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Fiscal Consolidations Under Fixed Exchange Rates

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  • Caselli, P.
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    Abstract

    We present the "fixed exchange rate" version of the Obstfeld and Rogoff model 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 Info

    Paper provided by Banca Italia - Servizio di Studi in its series Papers with number 336.

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    Length: 40 pages
    Date of creation: 1998
    Date of revision:
    Handle: RePEc:fth:banita:336

    Contact details of provider:
    Postal: Banca d'Italia-Servizio Studi-Divisione Biblioteca e Pubblicazioni - Via N azionale, 91 -00184 Rome, Italy.
    Web page: http://www.bancaditalia.it/
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    Related research

    Keywords: EXCHANGE RATE ; SOCIAL WELFARE ; FISCAL POLICY;

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    Cited by:
    1. Lane, P, 1999. "The New Open Economy Macroeconomics: A Survey," Trinity Economics Papers 993, Trinity College Dublin, Department of Economics.

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