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Welfare effects of fiscal policy under alternative exchange rate regimes: the role of the scale variable of money demand

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  • Pitterle, Ingo A.
  • Steffen, Dirk

Abstract

This paper investigates the implications of alternative scale variables of money demand for the comparison of a flexible exchange rate regime with a monetary union in a New Open Economy Macroeconomics setup. The welfare evaluation of exchange rate regimes esstentially depends on the exchange rate response under the flexible regime. When the scale variable is private consumption, a domestic fiscal expansion yields a depreciation of the domestic currency. The combined expenditure switching and terms-of-trade effects are beneficial to domestic households, who thus prefer a flexible exchange rate regime. However, when the scale variable is total absorption, the domestic currency appreciates and the welfare results are reversed.

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File URL: http://mpra.ub.uni-muenchen.de/13047/
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File URL: http://mpra.ub.uni-muenchen.de/13136/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13047.

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Date of creation: Apr 2004
Date of revision: Oct 2004
Handle: RePEc:pra:mprapa:13047

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Related research

Keywords: Fiscal Policy; New Open Economy Macroeconomics; Money Demand Specification; Flexible Exchange Rates; Monetary Union; Pricing-to-Market;

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  1. Daniel L. Thornton, 1988. "Should consumer expenditures be the scale variable in empirical money demand equations?," Working Papers 1988-003, Federal Reserve Bank of St. Louis.
  2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2000. "Price level determinacy and monetary policy under a balanced-budget requirement," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 211-246, February.
  3. Robert Kollmann, 2001. "The exchange rate in a dynamic-optimizing business cycle model with nominal rigidities: a quantitative investigation," ULB Institutional Repository 2013/7630, ULB -- Universite Libre de Bruxelles.
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  5. Ganelli, G., 2000. "Useful Government Spending, Direct Crowding Out and Fiscal Policy Interdependence," The Warwick Economics Research Paper Series (TWERPS) 547, University of Warwick, Department of Economics.
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  8. Philip R. Lane & Giovanni Ganelli, 2002. "Dynamic General Equilibrium Analysis: The Open Economy Dimension," Trinity Economics Papers 200212, Trinity College Dublin, Department of Economics.
  9. Robert Kollmann, 2001. "Explaining international comovements of output and asset returns: the role of money and nominal rigidities," ULB Institutional Repository 2013/7632, ULB -- Universite Libre de Bruxelles.
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  11. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
  12. Leonor Coutinho, 2003. "Fiscal Policy in the New Open Economy. Macroeconomics and Prospects for Fiscal Policy Coordination," Economics Working Papers 021, European Network of Economic Policy Research Institutes.
  13. Martine Carre & Fabrice Collard, 2000. "Monetary Union: A Welfare Based Approach," Econometric Society World Congress 2000 Contributed Papers 0526, Econometric Society.
  14. Mankiw, N Gregory & Summers, Lawrence H, 1986. "Money Demand and the Effects of Fiscal Policies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 18(4), pages 415-29, November.
  15. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Real indeterminacy in monetary models with nominal interest rate distortions: the problem with inflation targets," Working Paper 9818R, Federal Reserve Bank of Cleveland.
  16. Aoki, Masanao, 1985. "Misadjustment to anticipated shocks: an example of exchange-rate response," Journal of International Money and Finance, Elsevier, vol. 4(3), pages 415-420, September.
  17. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  18. Alan Sutherland, . "Exchange Rate Dynamics and Financial Market Integration," Discussion Papers 96/2, Department of Economics, University of York.
  19. Tille, Cedric, 2001. "The role of consumption substitutability in the international transmission of monetary shocks," Journal of International Economics, Elsevier, vol. 53(2), pages 421-444, April.
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