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.
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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 Macroeconomic)
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