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

  • Hjelm, Goran
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    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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    Article provided by Wiley Blackwell in its journal Scandinavian Journal of Economics.

    Volume (Year): 104 (2002)
    Issue (Month): 3 (September)
    Pages: 423-41

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    Handle: RePEc:bla:scandj:v:104:y:2002:i:3:p:423-41
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    1. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1399-1436, November.
    2. Campbell, John Y. & Mankiw, N. Gregory, 1991. "The response of consumption to income : A cross-country investigation," European Economic Review, Elsevier, vol. 35(4), pages 723-756, May.
    3. Zaghini, A., 1999. "The Economic Policy of Fiscal Consolidations: The European Experience," Papers 355, Banca Italia - Servizio di Studi.
    4. Alessandro Missale & Francesco Giavazzi & Pierpaolo Benigno, 1997. "Managing the Public Debt in Fiscal Stabilizations: The Evidence," NBER Working Papers 6311, National Bureau of Economic Research, Inc.
    5. Alberto Alesina & Roberto Perotti, 1996. "Fiscal Adjustments in OECD Countries; Composition and Macroeconomic Effects," IMF Working Papers 96/70, International Monetary Fund.
    6. Sutherland, Alan, 1997. "Fiscal crises and aggregate demand: can high public debt reverse the effects of fiscal policy?," Journal of Public Economics, Elsevier, vol. 65(2), pages 147-162, August.
    7. Bradley, John & Whelan, Karl, 1997. "The Irish expansionary fiscal contraction: A tale from one small European economy," Economic Modelling, Elsevier, vol. 14(2), pages 175-201, April.
    8. Hjelm, Göran, 1999. "The Effects of Fiscal Contractions: A Circumstantial Approach," Working Papers 1999:009, Lund University, Department of Economics.
    9. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
    10. Bertola, Giuseppe & Drazen, Allan, 1993. "Trigger Points and Budget Cuts: Explaining the Effects of Fiscal Austerity," American Economic Review, American Economic Association, vol. 83(1), pages 11-26, March.
    11. U. Michael Bergman & Michael M. Hutchison, . "The 'German View', Fiscal Consolidation and Consumption Booms: Empirical Evidence from Denmark," EPRU Working Paper Series 96-10, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    12. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
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