Intertemporal adjustment and fiscal policy under a fixed exchange rate regime
AbstractThe paper presents a dynamic model for small to medium open economies operating under a fixed exchange rate regime. The model provides a partial explanation of the channels through which fiscal and monetary policy affects the real exchange rate. An empirical investigation is conducted for the case of Argentina during the currency board period of 1991-2001. Empirical estimates show that fiscal policy may indeed be an efficient instrument for promoting macroeconomic stability insofar as it encourages convergence toward long-run equilibrium and alters the long-term balance between exports and consumption, both private and public. The simulation applied to Argentina shows that if the share of public spending in the economy is higher than the share of imports, an increase in the tax rate will stimulate capital stock slightly, at least in the short term, anddepreciate the real effective exchange rate. In the long run, the fiscal policy affects the value of the real exchange rate and consequently external competitiveness.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 4607.
Date of creation: 01 Apr 2008
Date of revision:
Currencies and Exchange Rates; Economic Stabilization; Debt Markets; Economic Theory&Research; Emerging Markets;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-09-13 (All new papers)
- NEP-CBA-2008-09-13 (Central Banking)
- NEP-MAC-2008-09-13 (Macroeconomics)
- NEP-OPM-2008-09-13 (Open Economy Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Karras, Georgios, 1994. "Government Spending and Private Consumption: Some International Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 9-22, February.
- Pierre-Richard Ag�Nor, 2006. "Market Sentiment and Macroeconomic Fluctuations under Pegged Exchange Rates," Economica, London School of Economics and Political Science, vol. 73(292), pages 579-604, November.
- Daniel, Betty C, 2001.
"A Fiscal Theory of Currency Crises,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 969-88, November.
- Betty Daniel, 2000. "A Fiscal Theory of Currency Crises," Econometric Society World Congress 2000 Contributed Papers 0535, Econometric Society.
- Serven, Luis & Frankel, Jeffrey & Fajnzylber, Eduardo & Schmukler, Sergio, 2000.
"Verifying exchange rate regimes,"
Policy Research Working Paper Series
2397, The World Bank.
- Ellen McGrattan & Richard Rogerson & Randall Wright, 1995.
"An equilibrium model of the business cycle with household production and fiscal policy,"
191, Federal Reserve Bank of Minneapolis.
- McGrattan, Ellen R & Rogerson, Richard & Wright, Randall, 1997. "An Equilibrium Model of the Business Cycle with Household Production and Fiscal Policy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 267-90, May.
- Corbo, Vittorio, 2002.
"Exchange Rate Regimes in the Americas: Is Dollarization the Solution?,"
Monetary and Economic Studies,
Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(S1), pages 91-111, December.
- Vittorio Corbo, 2002. "Exchange Rate Regimes in the Americas: Is Dollarization the Solution?," Documentos de Trabajo 229, Instituto de Economia. Pontificia Universidad Católica de Chile..
- Normandin, Michel, 1999.
"Budget deficit persistence and the twin deficits hypothesis,"
Journal of International Economics,
Elsevier, vol. 49(1), pages 171-193, October.
- Michel Normandin, 1994. "Budget Deficit Persistence and the Twin Deficits Hypothesis," Cahiers de recherche CREFE / CREFE Working Papers 31, CREFE, Université du Québec à Montréal.
- Michel Normandin, 1996. "Budget Deficit Persistence and the Twin Deficits Hypothesis," Macroeconomics 9607001, EconWPA.
- Enrique Alberola & Luis Molina, 2000. "Fiscal Discipline and Exchange Rate Regimes: a Case for Currency Boards?," Banco de Espaï¿½a Working Papers 0006, Banco de Espa�a.
- Chang, Wen-Ya & Tsai, Hsueh-Fang, 1998. "Government Spending and Real Interest Rate in an Open Economy," Review of International Economics, Wiley Blackwell, vol. 6(2), pages 284-91, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi).
If references are entirely missing, you can add them using this form.