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The Implications of Fiscal Conditions and Growing Internationalization for Monetary Policies and Financial Market Conditions

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  • International Monetary Fund

Abstract

The paper argues that the endogenous behavior of monetary authorities provides an important channel through which fiscal policy influences financial variables, and that growing internationalization has increased the sensitivity of financial conditions to fiscal policy. The core of the argument is that fiscal policy influences exchange rates, particularly to the extent that it affects the expected after-tax returns on capital located in different countries, and that the sensitivity of exchange rates to fiscal policy increases with growing internationalization. In addition, financial conditions reflect the actual and expected responses of the monetary authorities to exchange rates.

Suggested Citation

  • International Monetary Fund, 1988. "The Implications of Fiscal Conditions and Growing Internationalization for Monetary Policies and Financial Market Conditions," IMF Working Papers 1988/052, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1988/052
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