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Effects of Fiscal Contractions: The Importance of Preceding Exchange Rate Movements

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  • Hjelm, Goran

Abstract

We examine the importance of exchange rate and money supply movements for the macroeconomic outcome of fiscal contractions and find: (i) contractions associated with a favorable macroeconomic outcome have been preceded by significantly higher real depreciations as compared to contractions associated with a less favorable macroeconomic outcome and (ii) contractions preceded by real depreciations improve expectations about future income and generate higher private consumption growth. We discuss policy implications for countries both outside and inside the EMU. Copyright 2002 by The editors of the Scandinavian Journal of Economics.

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  • Hjelm, Goran, 2002. " Effects of Fiscal Contractions: The Importance of Preceding Exchange Rate Movements," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(3), pages 423-441, September.
  • Handle: RePEc:bla:scandj:v:104:y:2002:i:3:p:423-41
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    Cited by:

    1. Schclarek, Alfredo, 2007. "Fiscal policy and private consumption in industrial and developing countries," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 912-939, December.
    2. Christoph A. Schaltegger & Martin Weder, 2010. "Are Fiscal Adjustments Bad for Investment?," CREMA Working Paper Series 2010-17, Center for Research in Economics, Management and the Arts (CREMA).
    3. Hjelm, Göran, 2004. "When Are Fiscal Contractions Successful? Lessons for Countries Within and Outside the EMU," Working Papers 92, National Institute of Economic Research.
    4. Baldacci, Emanuele & Hillman, Arye L. & Kojo, Naoko C., 2004. "Growth, governance, and fiscal policy transmission channels in low-income countries," European Journal of Political Economy, Elsevier, vol. 20(3), pages 517-549, September.
    5. Julio Escolano & Laura Jaramillo & Carlos Mulas-Granados & G. Terrier, 2014. "How Much is A Lot? Historical Evidence on the Size of Fiscal Adjustments," IMF Working Papers 14/179, International Monetary Fund.
    6. Sanjeev Gupta & Emanuele Baldacci & Benedict Clements & Erwin R. Tiongson, 2005. "What sustains fiscal consolidations in emerging market countries?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(4), pages 307-321.
    7. Salvador Barrios & Sven Langedijk & Lucio Pench, 2010. "EU fiscal consolidation after the financial crisis. Lessons from past experiences," European Economy - Economic Papers 2008 - 2015 418, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    8. Johansson, Martin & Jönsson, Kristian, 2003. "Public debt and the effects of government expenditure on private consumption - A Kalman filter analysis of the Swedish experience 1970-1997," Working Papers 2003:3, Lund University, Department of Economics.
    9. Alfredo Schclarek, 2004. "Consumption and Keynesian Fiscal Policy," CESifo Working Paper Series 1310, CESifo Group Munich.
    10. Benedict J. Clements & Sanjeev Gupta & Erwin H Tiongson & Emanuele Baldacci, 2003. "What Sustains Fiscal Consolidations in Emerging Market Countries?," IMF Working Papers 03/224, International Monetary Fund.
    11. Ahmed Waqar Qasim & M. Ali Kemal & Omer Siddique, 2015. "Fiscal Consolidation and Economic Growth: A Case Study of Pakistan," PIDE-Working Papers 2015:124, Pakistan Institute of Development Economics.
    12. Mati, Amine & Thornton, John, 2008. "The exchange rate and fiscal consolidation episodes in emerging market economies," Economics Letters, Elsevier, vol. 100(1), pages 115-118, July.

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