Fiscal Discipline and the Choice of Exchange Rate Regime
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.
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"Fixed Exchange Rates As a Means to Price Stability: What Have we Learned?,"
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in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 303-330
National Bureau of Economic Research, Inc.
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