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Fiscal Discipline and the Choice of Exchange Rate Regime

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  • Tomell, Aaron
  • Velasco, Andrés

Abstract

Conventional wisdom claims that fixed exchange rates provide more fiscal discipline than do flexible rates, but the recent experiences in Europe, the record of Sub-Saharan countries in the 1980s, and the history of stabilization attempts in Latin America cast empirical doubts on this wisdom. To explore this puzzle we present a standard intertemporal model with perfect capital mobility and price flexibility, in which fiscal policy is endogenously determined by a maximizing fiscal authority.

Suggested Citation

  • Tomell, Aaron & Velasco, Andrés, 1994. "Fiscal Discipline and the Choice of Exchange Rate Regime," IDB Publications (Working Papers) 1144, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:1144
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    References listed on IDEAS

    as
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