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Balance of payments crises and fiscal adjustment measures

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  • Frenkel, Michael
  • Klein, Martin

Abstract

A model with optimizing firms and consumers is used to explore the effects of unannounced and preannounced fiscal adjustment policies that are intended to prevent an impending balance of payments crisis. It is shown that preannouncement unambiguously raises the required fiscal adjustment effort so that, from the government's point of view, "cold turkey" is the preferable policy. The effect of preannouncement on the private sector's adjustment cost is ambiguous since preannouncement induces an externality which may either benefit or harm the private sector, depending on the nature of the measure that is preannounced.

Suggested Citation

  • Frenkel, Michael & Klein, Martin, 1991. "Balance of payments crises and fiscal adjustment measures," Journal of Macroeconomics, Elsevier, vol. 13(4), pages 657-673.
  • Handle: RePEc:eee:jmacro:v:13:y:1991:i:4:p:657-673
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    Cited by:

    1. Ellis, Michael A. & Auernheimer, Leonardo, 1996. "Stabilization under capital controls," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 523-533, August.
    2. Kalyvitis, Sarantis C., 1997. "Evaluating the real effects of devaluation expectations in Greece under alternative policies," Economic Modelling, Elsevier, vol. 14(2), pages 215-236, April.

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