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Fiscal Policies and the Dollar/Pound Exchange Rate: 1870-1984

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  • Vittorio U. Grilli
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    Abstract

    This paper investigates the consequences of fiscal policies for the exchange rate. After developing a simple theory of how government financing policies should effect the exchange rate, we test it using data on the dollar/pound exchange rate. Previous analyses have concentrated mainly on the past-Bretton Woods flexible exchange rate system, thus ignoring potentially useful information contained In fixed exchange rate periods or in previous flexible exchange rate periods. This paper shows that it is theoretically proper and econometrically feasible to merge evidence from different nominal exchange rate systems. The gain of this procedure is that we can extend the sample period back to the 1870's. Our results suggest that permanent government expenditures are the only fiscal variables that significantly affected the dollar/pound nominal exchange rate. Budget deficits appear to be irrelevant in this respect.

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    File URL: http://www.nber.org/papers/w2482.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2482.

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    Date of creation: Jan 1988
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    Publication status: published as Grilli, Vittorio and Graciela Kaminsky. "Nominal Exchange Rate Regimes And The Real Exchange Rate: Evidence From The United States And Great Britain, 1885-1986," Journal of Monetary Economics, 1991, v27(2), 191-212.
    Handle: RePEc:nbr:nberwo:2482

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    1. Greenwood, Jeremy, 1983. "Expectations, the exchange rate, and the current account," Journal of Monetary Economics, Elsevier, vol. 12(4), pages 543-569, November.
    2. Martin S. Feldstein, 1986. "The Budget Deficit And The Dollar," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 355-409 National Bureau of Economic Research, Inc.
    3. Robert J. Barro, 1986. "The Behavior of United States Deficits," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 361-394 National Bureau of Economic Research, Inc.
    4. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
    5. Grilli, Vittorio U., 1986. "Buying and selling attacks on fixed exchange rate systems," Journal of International Economics, Elsevier, vol. 20(1-2), pages 143-156, February.
    6. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
    7. King, Robert G. & Plosser, Charles I., 1985. "Money, deficits, and inflation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 147-195, January.
    8. Kimbrough, Kent P., 1986. "The optimum quantity of money rule in the theory of public finance," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 277-284, November.
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    Cited by:
    1. Vittorio U. Grilli, 1988. "Seigniorage in Europe," NBER Working Papers 2778, National Bureau of Economic Research, Inc.

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