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Say you fix, enjoy and relax: the deleterious effect of peg announcements on fiscal discipline

Author

Listed:
  • Enrique Alberola

    () (Banco de España)

  • Luis Molina

    () (Banco de España)

  • Daniel Navia

    () (Banco de España)

Abstract

This paper explores the impact of actual exchange rate regimes on fiscal discipline, which we purportedly link to the effect of announcing the peg and to the availability of external funds. To stress this point, the focus of the analysis is emerging markets spanning from the beginning of the nineties, given the importance of financial integration in the last fifteen years and the centrality of external financing for these countries. We empirically show that announcing the pegs has deleterious effects on fiscal discipline, while "de facto" pegs which have not been announced deliver superior fiscal outcomes. The evidence suggests that this is due to the initial positive credibility shock of the announcement, which allows for easier and less costly access to the financing of fiscal deficits in emerging countries.

Suggested Citation

  • Enrique Alberola & Luis Molina & Daniel Navia, 2005. "Say you fix, enjoy and relax: the deleterious effect of peg announcements on fiscal discipline," Working Papers 0523, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0523
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    References listed on IDEAS

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    Cited by:

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    2. Mariya Hake & Fernando Lopez-Vicente & Luis Molina, 2014. "Do the Drivers of Loan Dollarization Differ between CESEE and Latin America? A Meta-Analysis," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 8-35.
    3. Luis J. Álvarez & Emmanuel Dhyne & Marco Hoeberichts & Claudia Kwapil & Hervé Le Bihan & Patrick Lünnemann & Fernando Martins & Roberto Sabbatini & Harald Stahl & Philip Vermeulen & Jouko Vilmunen, 2006. "Sticky Prices in the Euro Area: A Summary of New Micro-Evidence," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 575-584, 04-05.
    4. Arce, Oscar & López-Salido, J David, 2006. "House Prices, Rents and Interest Rates Under Collateral Constraints," CEPR Discussion Papers 5689, C.E.P.R. Discussion Papers.
    5. Hernández de Cos, Pablo & de Castro Fernández, Francisco, 2006. "The economic effects of exogenous fiscal shocks in Spain: a SVAR approach," Working Paper Series 647, European Central Bank.
    6. Enrique Alberola & Luis Molina & Pedro del Río, 2012. "Boom-bust cycles, imbalances and discipline in Europe," Working Papers 1220, Banco de España;Working Papers Homepage.
    7. Gabriel Jiménez & Vicente Salas-Fumás & Jesús Saurina, 2006. "Credit market competition, collateral and firms' finance," Working Papers 0612, Banco de España;Working Papers Homepage.
    8. Luis J. Álvarez & Pablo Burriel & Ignacio Hernando, 2010. "Price-setting behaviour in Spain: evidence from micro PPI data," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(2-3), pages 105-121.
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    10. Makram El‐Shagi, 2011. "The Impact of Fixed Exchange Rates on Fiscal Discipline," Scottish Journal of Political Economy, Scottish Economic Society, vol. 58(5), pages 685-710, November.
    11. Guillermo Vuletin, 2013. "Exchange Rate Regimes And Fiscal Discipline: The Role Of Capital Controls," Economic Inquiry, Western Economic Association International, vol. 51(4), pages 2096-2109, October.
    12. Paloma López-García & Sergio Puente, 2006. "Business demography in Spain: determinants of firm survival," Working Papers 0608, Banco de España;Working Papers Homepage.

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    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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