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Fiscal Discipline and the Choice of Exchange Rate Regime


  • Aaron Tornell
  • Andrés Velasco


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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  • Aaron Tornell & Andrés Velasco, 1994. "Fiscal Discipline and the Choice of Exchange Rate Regime," Research Department Publications 4004, Inter-American Development Bank, Research Department.
  • Handle: RePEc:idb:wpaper:4004

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    1. Francesco Giavazzi & Marco Pagano, 1991. "The Advantage of Tying One's Hands: EMS Discipline and Central Bank Credibility," NBER Chapters,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.
    2. Paul R Masson & Morris Goldstein & Jacob A. Frenkel, 1991. "Characteristics of a Successful Exchange Rate System," IMF Occasional Papers 82, International Monetary Fund.
    3. Devarajan, Shantayanan & Rodrik, Dani, 1991. "Do the benefits of fixed exchange rates outweigh their costs? The Franc Zone in Africa," Policy Research Working Paper Series 777, The World Bank.
    4. Svensson, Lars E. O., 1994. "Fixed exchange rates as a means to price stability: What have we learned?," European Economic Review, Elsevier, vol. 38(3-4), pages 447-468, April.
    5. Velasco, A., 1993. "A Model of Endogenous Fiscal Deficits and Delayed Fiscal Reforms," Working Papers 93-04, C.V. Starr Center for Applied Economics, New York University.
    6. Kiguel, Miguel A. & Liviatan, Nissan, 1992. "Stopping three big inflations (Argentina, Brazil, and Peru)," Policy Research Working Paper Series 999, The World Bank.
    7. Peter J Montiel & Bijan B. Aghevli & Mohsin S. Khan, 1991. "Exchange Rate Policy in Developing Countries; Some Analytical Issues," IMF Occasional Papers 78, International Monetary Fund.
    8. Stefania Bazzoni & Karim A. Nashashibi, 1993. "Alternative Exchange Rate Strategies and Fiscal Performance in Sub-Saharan Africa," IMF Working Papers 93/68, International Monetary Fund.
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