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Fiscal stabilization and exchange rate instability

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Author Info

  • Feltenstein, Andrew
  • Morris, Stephen

Abstract

The aim of this paper is to examine the implications for certain key macroeconomic variables in relation to reductions in public spending. In particular, the paper looks at; the rate of inflation, the interest rate, and the rate of growth of real GNP. The paper develops an intertemporal general equilibrium model that is used to analyze reductions in government spending and the implications for the exchange rate and the balance of payments of these reductions. Section II gives a brief review of background literature and provides an intuitive explanation of our model. Section III formally derives the analytics of the model, while Section IV sketches a proof of the existence of an intertemporal equilibrium. Section V gives some policy simulations using Mexican data, and finally, Section VI concludes the paper.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 74.

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Date of creation: 31 Aug 1988
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Handle: RePEc:wbk:wbrwps:74

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Related research

Keywords: Economic Stabilization; Banks&Banking Reform; Public Sector Economics&Finance; Economic Theory&Research; Environmental Economics&Policies;

References

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  1. Grossman, Herschel I & Lucas, Robert F, 1974. "The Macro-Economic Effects of Productive Public Expenditures," The Manchester School of Economic & Social Studies, University of Manchester, vol. 42(2), pages 162-70, June.
  2. Brennan, Geoffrey & Pincus, Jonathan J, 1983. "Government Expenditure Growth and Resource Allocation: The Nebulous Connection," Oxford Economic Papers, Oxford University Press, vol. 35(3), pages 351-65, November.
  3. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  4. Marchand, M. & Mintz, J. & Pestieau, P., 1984. "Shadow pricing of labour and capital in an economy with unemployed labour," European Economic Review, Elsevier, vol. 25(2), pages 239-252, July.
  5. Blanco, Herminio & Garber, Peter M, 1986. "Recurrent Devaluation and Speculative Attacks on the Mexican Peso," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 148-66, February.
  6. Calvo, Guillermo A., 1979. "Fiscal policy, welfare, and employment with perfect foresight," Journal of Macroeconomics, Elsevier, vol. 1(2), pages 149-166.
  7. Stephen W. Salant & Dale W. Henderson, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers 81, Board of Governors of the Federal Reserve System (U.S.).
  8. Groenewold, Nicolaas, 1980. "Fiscal policy with direct effects," Economics Letters, Elsevier, vol. 5(3), pages 219-224.
  9. Maurice Obstfeld, 1983. "Balance-of-Payments Crises and Devaluation," NBER Working Papers 1103, National Bureau of Economic Research, Inc.
  10. Connolly, Michael B & Taylor, Dean, 1984. "The Exact Timing of the Collapse of an Exchange Rate Regime and Its Impact on the Relative Price of Traded Goods," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(2), pages 194-207, May.
  11. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 627-48, August.
  12. Olivier J. Blanchard & Jeffrey Sachs, 1982. "Anticipations, Recessions and Policy: An Intertemporal Disequilibrium Model," NBER Working Papers 0971, National Bureau of Economic Research, Inc.
  13. Barro, Robert J., 1981. "Output Effects of Government Purchases," Scholarly Articles 3451294, Harvard University Department of Economics.
  14. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  15. Scarf,Herbert E. & Shoven,John B., 2008. "Applied General Equilibrium Analysis," Cambridge Books, Cambridge University Press, number 9780521070935, October.
  16. von Furstenberg, George M & Malkiel, Burton G, 1977. "The Government and Capital Formation: A Survey of Recent Issues," Journal of Economic Literature, American Economic Association, vol. 15(3), pages 835-78, September.
  17. Heller, Peter S, 1975. "A Model of Public Fiscal Behavior in Developing Countries: Aid, Investment, and Taxation," American Economic Review, American Economic Association, vol. 65(3), pages 429-45, June.
  18. David, Paul A & Scadding, John L, 1974. "Private Savings: Ultrarationality, Aggregation, and "Denison's Law."," Journal of Political Economy, University of Chicago Press, vol. 82(2), pages 225-49, Part I, M.
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Citations

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Cited by:
  1. Shah, Anwar, 1988. "Public infrastructure and private sector profitability and productivity in Mexico," Policy Research Working Paper Series 100, The World Bank.
  2. Willem H. Buiter, 1988. "Can Public Spending Cuts be Inflationary?," NBER Working Papers 2528, National Bureau of Economic Research, Inc.
  3. Feltenstein, Andrew & Shah, Anwar, 1991. "Tax policy options to promote private capital formation in Pakistan," Policy Research Working Paper Series 698, The World Bank.

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