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Exchange Rate Regimes And Fiscal Performance. Do Fixed Exchange Rate Regimes Generate More Discipline Than Flexible Ones?

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  • Guillermo J. Vuletin

Abstract

This paper analyzes the influence of exchange rate regimes on fiscal performance, focusing on the difference between fixed and flexible exchange rates. For these ends, a sample of 83 countries for the 1974-1998 period, the GMM methodology for dynamic proposal panel models proposed by Arellano and Bond (1991) and diverse exchange rate classifications are used. In relation to the latter, this paper discusses recent regime classifications and proposes a new exchange rate classification that permits to cover possible inconsistencies between the commitment of the central bank and its observed behavior. The results suggest that the influence of regimes on fiscal performance depend on the international context, specifically the possibility of indebtedness and of the characteristics of the international finance system –integration, volatility and dominant financial structure-. In other words, it depends on credit availability as well as on the conditions or potential sanctioning of the finance system. It is found that in situations in which there is no original fiscal discipline and the authorities have the possibility of financing with debt of relatively low cost, fixed regimes do not purvey per se greater fiscal discipline than the flexible ones. On the contrary, flexible ones generate more discipline. In contexts with strong financing restrictions, the discipline’s effects of both regimes are not substantially different. While in situations with abundance of capitals but where they are highly integrated, they are volatile and possibly subject to contagion effect. The same functioning of the international finance system can, through their potential sanction, achieve greater discipline in economies with fixed regimes that wish to stay as such.

Suggested Citation

  • Guillermo J. Vuletin, 2004. "Exchange Rate Regimes And Fiscal Performance. Do Fixed Exchange Rate Regimes Generate More Discipline Than Flexible Ones?," Econometric Society 2004 North American Winter Meetings 474, Econometric Society.
  • Handle: RePEc:ecm:nawm04:474
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Claude Bismut & Darine Ghanem, 2009. "This paper investigates empirically the reasons behind the popularity of fixed adjustable pegs in the Middle East North Africa region (MENA). We have used an ordered multinomial random effects probit ," Working Papers 09-10, LAMETA, Universitiy of Montpellier, revised Sep 2009.
    3. Alberola, Enrique & Molina, Luis & Navia, Daniel, 2007. "Say you fix, enjoy and relax. The deleterious effect of peg announcements on fiscal discipline in emerging markets," Emerging Markets Review, Elsevier, vol. 8(4), pages 328-338, December.
    4. Liliana B Schumacher & Jiro Honda, 2006. "Adopting Full Dollarization in Postconflict Economies; Would the Gains Compensate for the Losses in Liberia?," IMF Working Papers 06/82, International Monetary Fund.
    5. Mashkoor, Asim & Ahmed, Ovais & Herani, Dr. Gobin, 2015. "The relationship between Foreign Currency trading and Economic Development: A case Study of Pakistan," MPRA Paper 64482, University Library of Munich, Germany.

    More about this item

    Keywords

    exchange rate regimes; expenditure; revenues; deficits; international finance system; panel data; internal instruments; GMM;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • F3 - International Economics - - International Finance
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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