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Fiscal Policy and the Exchange Rate

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  • Jun Il Kim
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    Abstract

    By using a simple intertemporal model of the current account, I show that the exchange rate elasticity of the trade balance would ceteris paribus be smaller for countries with higher government spending ratios (relative to GDP) and with more limited scope for private consumption smoothing. This finding may have important implications for the design of adjustment programs and for resolving current global imbalances. It could also help explain and reconcile mixed empirical findings on trade elasticities.

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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=20328
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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/27.

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    Length: 13
    Date of creation: 01 Feb 2007
    Date of revision:
    Handle: RePEc:imf:imfwpa:07/27

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    Related research

    Keywords: Exchange rates; Economic models; exchange rate; government spending; real exchange rate; fiscal policy; fiscal tightening; budget constraint; reduction in government spending; exchange rate correction; fiscal balance; increase in consumption; exchange rate movement; current account balance;

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