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Fiscal Discipline and the Choice of Exchange Rate Regime

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  • Aaron Tornell
  • Andrés Velasco

Abstract

Conventional wisdom claims that fixed exchange rates provide more fiscal discipline than do flexible rates, but the recent experiences in Europe, the record of Sub-Saharan countries in the 1980s, and the history of stabilization attempts in Latin America cast empirical doubts on this wisdom. To explore this puzzle we present a standard intertemporal model with perfect capital mobility and price flexibility, in which fiscal policy is endogenously determined by a maximizing fiscal authority.

Suggested Citation

  • Aaron Tornell & Andrés Velasco, 1994. "Fiscal Discipline and the Choice of Exchange Rate Regime," Research Department Publications 4004, Inter-American Development Bank, Research Department.
    • Handle: RePEc:idb:wpaper:4004
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    References listed on IDEAS

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