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Fiscal Policy, Monetary Regimes and Current Account Dynamics

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  • Bernhard Herz
  • Stefan Hohberger

Abstract

The paper examines the stabilizing properties of fiscal policy for current account imbalances under alternative exchange rate regimes. Using a small open economy DSGE model with fiscal feedback rules, we investigate the dynamic responses of different shocks to macroeconomic variables and their implication for the current account. Our results imply that a fiscal response to the current account improves the stabilizing effect of most macroeconomic variables compared to a countercyclical response to output. The loss of national monetary policy when entering into a monetary union leads to higher variability and more persistence of the real exchange rate and the current account. Despite the stabilizing properties, fiscal policy intervention induces higher variability of output in the short-run and therefore faces a trade-off between stabilizing the external position and output
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  • Bernhard Herz & Stefan Hohberger, 2013. "Fiscal Policy, Monetary Regimes and Current Account Dynamics," Review of International Economics, Wiley Blackwell, vol. 21(1), pages 118-136, February.
  • Handle: RePEc:bla:reviec:v:21:y:2013:i:1:p:118-136 DOI: 10.1111/roie.2013.21.issue-1
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    Cited by:

    1. George Economides & Apostolis Philippopoulos & Petros Varthalitis, 2016. "Monetary Union, Even Higher Integration, or Back to National Currencies?," CESifo Economic Studies, CESifo, vol. 62(2), pages 232-255.
    2. Clancy, Daragh & Jacquinot, Pascal & Lozej, Matija, 2014. "The Effects of Government Spending in a Small Open Economy within a Monetary Union," Research Technical Papers 12/RT/14, Central Bank of Ireland.
    3. Apostolis Philippopoulos & Petros Varthalitis & Vanghelis Vassilatos, 2017. "Fiscal Consolidation in an Open Economy with Sovereign Premia and without Monetary Policy Independence," International Journal of Central Banking, International Journal of Central Banking, vol. 13(4), pages 259-306, December.
    4. Stefan Hohberger & Lukas Vogel & Bernhard Herz, 2014. "Budgetary-Neutral Fiscal Policy Rules and External Adjustment," Open Economies Review, Springer, pages 909-936.
    5. Zarko Kalamov & Klaas Staal, 2016. "Public debt, bailouts, and common bonds," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(4), pages 670-692, August.
    6. repec:eee:dyncon:v:83:y:2017:i:c:p:55-106 is not listed on IDEAS
    7. Philippopoulos, Apostolis & Varthalitis, Petros & Vassilatos, Vanghelis, 2017. "Fiscal consolidation and its cross-country effects," Journal of Economic Dynamics and Control, Elsevier, pages 55-106.
    8. Brissimis, Sophocles N. & Magginas, Nicholas S., 2005. "Changes in financial structure and asset price substitutability: A test of the bank lending channel," Economic Modelling, Elsevier, pages 879-904.
    9. Hubrich, Kirstin & Tetlow, Robert J., 2015. "Financial stress and economic dynamics: The transmission of crises," Journal of Monetary Economics, Elsevier, pages 100-115.

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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