Do Fixed Exchange Rates Induce More Fiscal Discipline?
AbstractConventional wisdom has held that a fixed exchange rate regime induces more fiscal discipline, but Tornell and Velasco (1995, 1998) argue the opposite. Using a dynamic model with fragmented fiscal policymaking, this paper evaluates the two arguments in a single framework and shows that (1) future punishment against fiscal laxity exists under both fixed and flexible regimes; (2) fiscal authorities have a greater incentive to spend more today under fixed rates than under flexible rates; (3) in the presence of both factors above, fixed rates will induce more fiscal discipline only if the future punishment is sufficiently stronger than under flexible rates; and (4) neither fixed nor flexible rates could resolve the structural distortions caused by fragmented policymaking, and fiscal centralization needs to be undertaken to strengthen fiscal discipline.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 03/78.
Date of creation: 01 Apr 2003
Date of revision:
Contact details of provider:
Postal: International Monetary Fund, Washington, DC USA
Phone: (202) 623-7000
Fax: (202) 623-4661
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC
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.:
- By A. Javier Hamann, 2001.
"Exchange-Rate-Based Stabilization: A Critical Look at the Stylized Facts,"
IMF Staff Papers,
Palgrave Macmillan, vol. 48(1), pages 4.
- A. Javier Hamann, 1999. "Exchange-Rate-Based Stabilization - ACritical Look at the Stylized Facts," IMF Working Papers 99/132, International Monetary Fund.
- Talvi, Ernesto, 1997. "Exchange rate-based stabilization with endogenous fiscal response," Journal of Development Economics, Elsevier, vol. 54(1), pages 59-75, October.
- Reinhart, Carmen M. & Vegh, Carlos A., 1995.
"Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination,"
Journal of Development Economics,
Elsevier, vol. 46(2), pages 357-378, April.
- Reinhart, Carmen & Vegh, Carlos, 1995. "Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination," MPRA Paper 13898, University Library of Munich, Germany.
- Canavan, Chris & Tommasi, Mariano, 1997. "On the credibility of alternative exchange rate regimes," Journal of Development Economics, Elsevier, vol. 54(1), pages 101-122, October.
- de Kock, Gabriel & Grilli, Vittorio, 1993. "Fiscal Policies and the Choice of Exchange Rate Regime," Economic Journal, Royal Economic Society, vol. 103(417), pages 347-58, March.
- Fatás, Antonio & Rose, Andrew K, 2001. "Do Monetary Handcuffs Restrain Leviathan? Fiscal Policy in Extreme Exchange Rate Regimes," CEPR Discussion Papers 2692, C.E.P.R. Discussion Papers.
- Tornell, Aaron & Velasco, Andres, 1995. "Fiscal discipline and the choice of exchange rate regime," European Economic Review, Elsevier, vol. 39(3-4), pages 759-770, April.
- Rui Ota & Stephanie Medina Cas, 2008. "Big Government, High Debt, and Fiscal Adjustment in Small States," IMF Working Papers 08/39, International Monetary Fund.
- Ondrej Schneider & Jan Zápal, 2005.
"Fiscal Policy in New EU Member States – Go East, Prudent Man!,"
CESifo Working Paper Series
1486, CESifo Group Munich.
- Ondrej Schneider & Jan Zapal, 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.
- Ondřej Schneider & Jan Zápal, 2005. "Fiscal Policy in New EU Member States: Go East, Prudent Man!," Working Papers IES 76, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
- 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.
- Helge Berger & George Kopits & István P. Székely, 2007.
"Fiscal Indulgence In Central Europe: Loss Of The External Anchor?,"
Scottish Journal of Political Economy,
Scottish Economic Society, vol. 54(1), pages 116-135, 02.
- Berger, Helge & Kopits, George & Székely, István P., 2006. "Fiscal indulgence in Central Europe: loss of the external anchor?," Discussion Papers 2006/9, Free University Berlin, School of Business & Economics.
- George Kopits & Helge Berger & IstvÃ¡n P. SzÃ©kely, 2004. "Fiscal Indulgence in Central Europe: Loss of the External Anchor," IMF Working Papers 04/62, International Monetary Fund.
- Agenor, Pierre-Richard & Aizenman, Joshua, 2008.
"Capital Market Imperfections and the Theory of Optimum Currency Areas,"
Santa Cruz Department of Economics, Working Paper Series
qt7668j94x, Department of Economics, UC Santa Cruz.
- Agénor, Pierre-Richard & Aizenman, Joshua, 2011. "Capital market imperfections and the theory of optimum currency areas," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1659-1675.
- Pierre-Richard Agenor & Joshua Aizenman, 2008. "Capital Market Imperfections and the Theory of Optimum Currency Areas," NBER Working Papers 14088, National Bureau of Economic Research, Inc.
- Rupa Duttagupta & Guillermo Tolosa, 2006. "Fiscal Discipline and Exchange Rate Regimes: Evidence from the Caribbean," IMF Working Papers 06/119, International Monetary Fund.
- Martin Grandes & Helmut Reisen, 2003. "Hard Peg versus Soft Float. A Tale of Two Latin-American Countries," Revue économique, Presses de Sciences-Po, vol. 54(5), pages 1057-1090.
- John Lewis, 2007. "Fiscal policy in central and Eastern Europe: what happened in the run-up to EU accession?," International Economics and Economic Policy, Springer, vol. 4(1), pages 15-31, April.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi).
If references are entirely missing, you can add them using this form.