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Money-Based versus Exchange Rate-Based Stabilization with Endogenous Fiscal Policy

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  • Aaron Tornell
  • Andres Velasco

Abstract

We present a standard intertemporal model in which fiscal policy is determined by an optimizing but non-benevolent fiscal authority. If the fiscal authority is impatient, a money-based stabilization provides more fiscal discipline and higher welfare for the representative agent than does an exchange rate-based stabilization. Data for Latin American stabilizations in the last quarter-century seem to confirm the notion that stabilizing by using money rather than the exchange rate helps induce politicians to reduce the fiscal deficit.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5300.

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Date of creation: Oct 1995
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Handle: RePEc:nbr:nberwo:5300

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References

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  1. Klein, Michael W. & Marion, Nancy P., 1997. "Explaining the duration of exchange-rate pegs," Journal of Development Economics, Elsevier, Elsevier, vol. 54(2), pages 387-404, December.
  2. Kathryn M. Dominguez, 1991. "Do Exchange Auctions Work? An Examination of the Bolivian Experience," NBER Working Papers 3683, National Bureau of Economic Research, Inc.
  3. Corbo, Vittorio & de Melo, Jaime, 1987. "Lessons from the Southern Cone Policy Reforms," World Bank Research Observer, World Bank Group, World Bank Group, vol. 2(2), pages 111-42, July.
  4. Paul R. Masson & Morris Goldstein & Jacob A. Frenkel, 1991. "Characteristics of a Successful Exchange Rate System," IMF Occasional Papers, International Monetary Fund 82, International Monetary Fund.
  5. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  6. Sachs, Jeffrey & Tornell, Aaron & Velasco, Andres, 1995. "The Collapse of the Mexican Peso: What Have We Learned?," Working Papers, C.V. Starr Center for Applied Economics, New York University 95-22, C.V. Starr Center for Applied Economics, New York University.
  7. Peter Montiel & Bijan B. Aghevli & Mohsin S. Khan, 1991. "Exchange Rate Policy in Developing Countries," IMF Occasional Papers, International Monetary Fund 78, International Monetary Fund.
  8. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall.
  9. Calvo, Guillermo A, 1986. "Fractured Liberalism: Argentina under Martinez de Hoz," Economic Development and Cultural Change, University of Chicago Press, University of Chicago Press, vol. 34(3), pages 511-33, April.
  10. Michael Bruno & Guido Di Tella & Rudiger Dornbusch & Stanley Fischer, 1988. "Inflation Stabilization: The Experience of Israel, Argentina, Brazil, Bolivia, and Mexico," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262022796, December.
  11. Liviatan, Nissan, 1984. "Tight money and inflation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 13(1), pages 5-15, January.
  12. Kiguel, Miguel A. & Liviatan, Nissan, 1992. "Stopping three big inflations (Argentina, Brazil, and Peru)," Policy Research Working Paper Series, The World Bank 999, The World Bank.
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Cited by:
  1. Dalia Grigonyté, 2003. "Impact of Currency Boards on Fiscal Policy in Central and Eastern European Countries," Economic Change and Restructuring, Springer, Springer, vol. 36(2), pages 111-133, June.
  2. Guillermo Javier Vúletin, 2002. "Regímenes Cambiarios y Performance Fiscal ¿Generan los Regímenes Fijos Mayor Disciplina que los Flexibles?," Department of Economics, Working Papers 042, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.
  3. Andres Velasco, 1997. "Debts and Deficits with Fragmented Fiscal Policymaking," NBER Working Papers 6286, National Bureau of Economic Research, Inc.
  4. Canavan, Chris & Tommasi, Mariano, 1997. "On the credibility of alternative exchange rate regimes," Journal of Development Economics, Elsevier, Elsevier, vol. 54(1), pages 101-122, October.
  5. Eugenio Diaz Bonilla & Hector E. Schamis, 1999. "The Political Economy of Exchange Rate Policies in Argentina," Research Department Publications, Inter-American Development Bank, Research Department 3078, Inter-American Development Bank, Research Department.
  6. Juan Carlos Echeverry & Jorge Alexander Bonilla & Andrés Moya, 2006. "Rigideces Institucionales y Flexibilidad Presupuestaria: Origen, Motivación y Efectos sobre el Presupuesto," IDB Publications 9091, Inter-American Development Bank.
  7. A. Javier Hamann & Alessandro Prati, 2002. "Why Do Many Disinflations Fail? the Importance of Luck, Timing, and Political Institutions," IMF Working Papers, International Monetary Fund 02/228, International Monetary Fund.
  8. Hanns-Dieter Jacobsen et. al, 2004. "Economic, Political, Institutional as well as Social Risks and Opportunities of EMU Enlargement," Eastward Enlargement of the Euro-zone Working Papers, Free University Berlin, Jean Monnet Centre of Excellence wp22, Free University Berlin, Jean Monnet Centre of Excellence, revised 01 Jun 2004.
  9. Guillermo J. Vuletin, 2004. "Exchange Rate Regimes And Fiscal Performance. Do Fixed Exchange Rate Regimes Generate More Discipline Than Flexible Ones?," Econometric Society 2004 North American Winter Meetings, Econometric Society 474, Econometric Society.
  10. Eugenio Diaz Bonilla & Hector E. Schamis, 1999. "La economía política de las políticas de cambio en Argentina," Research Department Publications, Inter-American Development Bank, Research Department 3079, Inter-American Development Bank, Research Department.
  11. Chris Canavan & Mariano Tommasi, 1997. "Visibility and Credibility in the Political Economy of Reform," Boston College Working Papers in Economics, Boston College Department of Economics 346., Boston College Department of Economics.
  12. Vladimir Klyuev, 2001. "A Model of Exchange Rate Regime Choice in the Transitional Economies of Central and Eastern Europe," IMF Working Papers, International Monetary Fund 01/140, International Monetary Fund.

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