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Exchange-rate management viewed as tax policies

  • Frenkel, Jacob A.
  • Razin, Assaf

The paper develops an analytical framework which demonstrates that the various forms of exchange-rate management are equivalent to corresponding tax policies. To highlight the salient issues, we consider two specific categories of exchange-rate policies. The first is a dual exchange-rate regime, which separates exchange rates for commercial and for financial transactions, and the second is a unified exchange-rate system in which the country unilaterally pegs its exchange rate at the same rate for all transactions. We show that the dual exchange rate policies can be usefully cast as distortionary taxes on international borrowing, and a unified pegged exchange-rate policies can be usefully cast as lump-sum tax cum subsidy policies. The equivalence between the various characteristics of exchange-rate management and tax management suggests that exchange-rate analysis could be usefully incorporated into the broader framework of the analysis of fiscal policies. A two-country model of the world economy is used to demonstrate the international transmission mechanism of these policies.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 33 (1989)
Issue (Month): 4 (April)
Pages: 761-781

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Handle: RePEc:eee:eecrev:v:33:y:1989:i:4:p:761-781
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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  1. Alan C. Stockman & Alejandro Hernandez D., 1985. "Exchange Controls, Capital Controls, and International Financial Markets," NBER Working Papers 1755, National Bureau of Economic Research, Inc.
  2. Maurice Obstfeld, 1984. "Capital Controls, The Dual Exchange Rate, and Devaluation," NBER Working Papers 1324, National Bureau of Economic Research, Inc.
  3. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 865-90, October.
  4. Joshua Aizenman, 1985. "On the Complementarity of Commercial Policy, Capital Controls and Inflation Tax," NBER Working Papers 1583, National Bureau of Economic Research, Inc.
  5. Alan C. Stockman, 1978. "A Theory of Exchange Rate Determination," UCLA Economics Working Papers 122, UCLA Department of Economics.
  6. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-94, June.
  7. Adams, Charles & Greenwood, Jeremy, 1985. "Dual exchange rate systems and capital controls: An investigation," Journal of International Economics, Elsevier, vol. 18(1-2), pages 43-63, February.
  8. Persson, Torsten, 1984. "Real transfers in fixed exchange rate systems and the international adjustment mechanism," Journal of Monetary Economics, Elsevier, vol. 13(3), pages 349-369, May.
  9. Dornbusch, Rudiger, 1986. "Special Exchange Rates for Capital Account Transactions," World Bank Economic Review, World Bank Group, vol. 1(1), pages 3-33, September.
  10. Greenwood, Jeremy, 1983. "Expectations, the exchange rate, and the current account," Journal of Monetary Economics, Elsevier, vol. 12(4), pages 543-569, November.
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