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Fiscal Policy and Exchange Rates

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  • Barbara Annicchiarico

Abstract

This paper examines the dynamics of the nominal exchange rate and fiscal deficits in a continuous time optimizing general equilibrium model with finite horizon. It is shown that alternative financing modes of budget deficits imply different patterns of adjustment along the transitional path towards the steady state equilibrium. In particular, the respect of public solvency without money financing is not suffcient to avoid the depreciation of the exchange rate in the long-run after a fiscal expansion.
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Suggested Citation

  • Barbara Annicchiarico, 2006. "Fiscal Policy and Exchange Rates," Journal of Economics, Springer, vol. 89(2), pages 165-185, November.
    • Handle: RePEc:kap:jeczfn:v:89:y:2006:i:2:p:165-185
    DOI: 10.1007/s00712-006-0212-8
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    1. repec:got:cegedp:84 is not listed on IDEAS
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    3. César Calderón M., 2004. "An Analysis of the Behavior of the Real Exchange Rate in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 7(1), pages 5-30, April.
    4. Calderón, César & Kubota, Megumi, 2018. "Does higher openness cause more real exchange rate volatility?," Journal of International Economics, Elsevier, vol. 110(C), pages 176-204.

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    More about this item

    Keywords

    exchange rates; fiscal deficits; current account dynamics; F31; F32; E62;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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