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Fiscal Policy and Exchange Rates

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  • Barbara Annicchiarico

    (University of Bristol - Department of Economics)

Abstract

This paper examines the dynamics of the nominal exchange rate and fiscal deficits in a continuous time optimizing general equilibrium model with finite horizon. It is shown that alternative financing modes of budget deficits imply different patterns of adjustment along the transitional path towards the steady state equilibrium. In particular, the respect of public solvency without money financing is not suffcient to avoid the depreciation of the exchange rate in the long-run after a fiscal expansion.

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File URL: ftp://www.ceistorvergata.it/repec/rpaper/No-07-Annicchiarico.pdf
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Bibliographic Info

Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 7.

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Length: 34
Date of creation: 07 Jun 2003
Date of revision:
Handle: RePEc:rtv:ceisrp:7

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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
Phone: +390672595601
Fax: +39062020687
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Web page: http://www.ceistorvergata.it
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Postal: CEIS - Centre for Economic and International Studies - Faculty of Economics - University of Rome "Tor Vergata" - Via Columbia, 2 00133 Roma
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Web: http://www.ceistorvergata.it

Related research

Keywords: Exchange Rates; Fiscal Deficits; Current Account Dynamics;

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References

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  1. Weil, Philippe, 1991. "Is Money Net Wealth?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(1), pages 37-53, February.
  2. Elhanan Helpman & Assaf Razin, 1985. "Exchange Rate Management: Intertemporal Tradoffs," NBER Working Papers 1590, National Bureau of Economic Research, Inc.
  3. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 1998. "Is the Price Level Determined by the Needs of Fiscal Solvency?," NBER Working Papers 6471, National Bureau of Economic Research, Inc.
  4. Calvo, Guillermo A., 1987. "Real exchange rate dynamics with nominal parities Structural change and overshooting," Journal of International Economics, Elsevier, vol. 22(1-2), pages 141-155, February.
  5. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, vol. 4(3), pages 381-99.
  6. Matsuyama, Kiminori, 1987. "Current account dynamics in a finite horizon model," Journal of International Economics, Elsevier, vol. 23(3-4), pages 299-313, November.
  7. Christopher Erceg & Luca Guerrieri, 2005. "Expansionary Fiscal Shocks and the Trade Deficit," Computing in Economics and Finance 2005 128, Society for Computational Economics.
  8. Marini, Giancarlo & van der Ploeg, Frederick, 1988. "Monetary and Fiscal Policy in an Optimising Model with Capital Accumulation and Finite Lives," Economic Journal, Royal Economic Society, vol. 98(392), pages 772-86, September.
  9. Daniel, Betty C., 1993. "Uncertainty and the timing of taxes," Journal of International Economics, Elsevier, vol. 34(1-2), pages 95-114, February.
  10. Detken, Carsten, 1999. "Fiscal policy effectiveness and neutrality results in a non-Ricardian world," Working Paper Series 0003, European Central Bank.
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  12. Soyoung Kim & Nouriel Roubini, 2004. "Twin Deficit or Twin Divergence? Fiscal Policy, Current Account, and Real Exchange Rate in the US," Econometric Society 2004 North American Winter Meetings 271, Econometric Society.
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  14. Michael Woodford, 1995. "Price Level Determinacy Without Control of a Monetary Aggregate," NBER Working Papers 5204, National Bureau of Economic Research, Inc.
  15. Henning Bohn, 2005. "The Sustainability of Fiscal Policy in the United States," CESifo Working Paper Series 1446, CESifo Group Munich.
  16. Daniel, Betty C., 2000. "The timing of exchange rate collapse," Journal of International Money and Finance, Elsevier, vol. 19(6), pages 765-784, December.
  17. Canzoneri, Matthew B & Cumby, Robert E & Diba, Behzad T, 2001. "Fiscal Discipline and Exchange Rate Systems," Economic Journal, Royal Economic Society, vol. 111(474), pages 667-90, October.
  18. Kawai, Masahiro & Maccini, Louis J, 1995. "Twin Deficits versus Unpleasant Fiscal Arithmetic in a Small Open Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 639-58, August.
  19. Betty Daniel, 2000. "A Fiscal Theory of Currency Crises," Econometric Society World Congress 2000 Contributed Papers 0535, Econometric Society.
  20. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  21. Willem H. Buiter, 2002. "The Fiscal Theory Of The Price Level: A Critique," Economic Journal, Royal Economic Society, vol. 112(481), pages 459-480, July.
  22. Dupor, Bill, 2000. "Exchange rates and the fiscal theory of the price level," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 613-630, June.
  23. Drazen, Allan & Helpman, Elhanan, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 835-55, November.
  24. Daniel, Betty C., 2001. "The fiscal theory of the price level in an open economy," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 293-308, October.
  25. Christopher J. Erceg & Luca Guerrieri & Christopher Gust, 2005. "Expansionary Fiscal Shocks and the US Trade Deficit," International Finance, Wiley Blackwell, vol. 8(3), pages 363-397, December.
  26. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-94, June.
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Citations

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Cited by:
  1. César Calderón, 2004. "Un Análisis del Comportamiento del Tipo de Cambio Real en Chile," Working Papers Central Bank of Chile 266, Central Bank of Chile.
  2. Makram El‐Shagi, 2011. "The Impact of Fixed Exchange Rates on Fiscal Discipline," Scottish Journal of Political Economy, Scottish Economic Society, vol. 58(5), pages 685-710, November.
  3. Calderon, Cesar & Kubota, Megumi, 2009. "Does higher openness cause more real exchange rate volatility ?," Policy Research Working Paper Series 4896, The World Bank.
  4. El-Shagi, Makram, 2009. "The impact of fixed exchange rates on fiscal discipline," Center for European, Governance and Economic Development Research Discussion Papers 84, University of Goettingen, Department of Economics.

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