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Floating or fixed exchange rates: The role of government size

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  • Philipp Wegmueller

Abstract

This paper contributes to the resurging debate on the reform of the international monetary system by studying how the size of the public sector influences the choice of the exchange rate regime. In response to a meeting of the Bretton Woods Committee in 1993, Anna Schwartz (2000) argued that a large public sector impedes the viability of an exchange rate regime with a fixed rule for convertibility. Quantifying her line of reasoning from a welfare-based perspective leads to three main results: (1) Returning to a fixed exchange rate arrangement implies high welfare losses for countries with large public sectors; (2) The welfare loss is increasing in government size; (3) Increasing the share of public expenditures reduces output volatility, yet increasing the level of distortionary taxes enhances it

Suggested Citation

  • Philipp Wegmueller, 2014. "Floating or fixed exchange rates: The role of government size," Diskussionsschriften dp1404, Universitaet Bern, Departement Volkswirtschaft.
    • Handle: RePEc:ube:dpvwib:dp1404
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    More about this item

    Keywords

    Exchange Rate Regimes; Government Size; Welfare; Macroeconomic Stability;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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