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Real Exchange Rate Effects of Fiscal Policy


  • Jeffrey Sachs
  • Charles Wyplosz


This paper develops a framework for analyzing the effects of fiscal policy on the real exchange rate. The short-run impact of various types of fiscal measures are considered as well as the dynamics of adjustment to long-run steady states. The analysis and related simulations suggest that the effect of fiscal policy changes on the real exchange rate can vary widely and will depend closely on a number of structural features, including the degree of asset substitutability,the composition of government spending, and the initial size of the public debt and net external position.

Suggested Citation

  • Jeffrey Sachs & Charles Wyplosz, 1984. "Real Exchange Rate Effects of Fiscal Policy," NBER Working Papers 1255, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1255
    Note: ITI IFM

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    References listed on IDEAS

    1. Hodrick, Robert J., 1980. "Dynamic effects of government policies in an open economy," Journal of Monetary Economics, Elsevier, vol. 6(2), pages 213-239, April.
    2. Turnovsky, Stephen J., 1976. "The dynamics of fiscal policy in an open economy," Journal of International Economics, Elsevier, vol. 6(2), pages 115-142, May.
    3. Kouri, Pentti J K, 1976. " The Exchange Rate and the Balance of Payments in the Short Run and in the Long Run: A Monetary Approach," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 280-304.
    4. Christ, Carl F, 1979. "On Fiscal and Monetary Policies and the Government Budget Restraint," American Economic Review, American Economic Association, vol. 69(4), pages 526-538, September.
    5. William H. Branson & Willem H. Buiter, 1982. "Monetary and Fiscal Policy with Flexible Exchange Rates," NBER Working Papers 0901, National Bureau of Economic Research, Inc.
    6. William H. Branson, 1976. "The Dual Roles of the Government Budget and the Balance of Payments in the Movement from Short-Run to Long-Run Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 90(3), pages 345-367.
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    Cited by:

    1. Rudiger Dornbusch & Stanley Fischer, 1986. "The Open Economy: Implications for Monetary and Fiscal Policy," NBER Chapters,in: The American Business Cycle: Continuity and Change, pages 459-516 National Bureau of Economic Research, Inc.
    2. Antoine Bouveret & Bruno Ducoudre, 2007. "On the Contingency of Equilibrium Exchange Rates with Time - Consistent Economic Policies," Sciences Po publications 2007-08, Sciences Po.
    3. Jeffrey Sachs & Warwick J. McKibbin, 1985. "Macroeconomic Policies in the OECD and LDC External Adjustmemt," NBER Working Papers 1534, National Bureau of Economic Research, Inc.
    4. repec:spo:wpecon:info:hdl:2441/6125 is not listed on IDEAS
    5. Carmen M. Reinhart, 1991. "Fiscal Policy, the Real Exchange Rate, and Commodity Prices," IMF Staff Papers, Palgrave Macmillan, vol. 38(3), pages 506-524, September.
    6. Oumar Diallo & Boileau Loko & Kangni R Kpodar, 2007. "Buoyant Capital Spending and Worries over Real Appreciation; Cold Facts from Algeria," IMF Working Papers 07/286, International Monetary Fund.
    7. Luis N. Lanteri, 2015. "Efectos de la enfermedad holandesa ('Dutch disease'). Alguna evidencia para Argentina," REVISTA DE ECONOMÍA DEL ROSARIO, UNIVERSIDAD DEL ROSARIO, vol. 18(2), pages 187-209, December.
    8. Malcolm Knight & Paul Masson, 1988. "Fiscal Policies, Net Saving, and Real Exchange Rates: The United States, the Federal Republic of Germany, and Japan," NBER Chapters,in: International Aspects of Fiscal Policies, pages 21-72 National Bureau of Economic Research, Inc.
    9. Eichengreen, Barry & Wyplosz, Charles, 1986. "The Economic Consequences of the Franc Poincare," CEPR Discussion Papers 136, C.E.P.R. Discussion Papers.
    10. Eichengreen, Barry, 1989. "International Monetary Istability Between the Wars: Structural Flaws or Misguided Policies?," Department of Economics, Working Paper Series qt5r60q801, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    11. Bernd Hayo & Matthias Uhl, 2015. "Regional effects of federal tax shocks," Southern Economic Journal, Southern Economic Association, vol. 82(2), pages 343-360, October.
    12. Michael Hutchison & Charles Pigott, 1984. "Budget deficits, exchange rates and the current account: theory and U. S. evidence," Economic Review, Federal Reserve Bank of San Francisco, issue Fall, pages 5-25.
    13. Barry J. Eichengreen, 1987. "Trade deficits in the long run," Proceedings, Federal Reserve Bank of St. Louis, pages 239-285.
    14. Luis N. Lanteri, 2016. "Exportaciones de manufacturas de origen industrial (moi) en Argentina. Manufactured exports of industrial origin (moi) in Argentina," Economía Coyuntural,Revista de temas de perspectivas y coyuntura, Instituto de Investigaciones Económicas y Sociales 'José Ortiz Mercado' (IIES-JOM), Facultad de Ciencias Económicas, Administrativas y Financieras, Universidad Autónoma Gabriel René Moreno, vol. 1(3), pages 1-22.
    15. Marialuz Moreno Badia & Alex Segura-Ubiergo, 2014. "Real Exchange Rate Appreciation in Emerging Markets; Can Fiscal Policy Help?," IMF Working Papers 14/1, International Monetary Fund.
    16. Tarlok Singh, 2007. "Intertemporal Optimizing Models Of Trade And Current Account Balance: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 25-64, February.
    17. Turnovsky, Stephen J., 1986. "Short-term and long-term interest rates in a monetary model of a small open economy," Journal of International Economics, Elsevier, vol. 20(3-4), pages 291-311, May.
    18. repec:eee:iburev:v:26:y:2017:i:3:p:476-490 is not listed on IDEAS
    19. Richard Cantor & Robert Driskill, 1996. "Can a fiscal contraction strengthen a currency?: Some doubts about conventional Mundell-Fleming results," Research Paper 9629, Federal Reserve Bank of New York.
    20. Bruno Ducoudre, 2008. "Structure par terme des taux d’intérêt et anticipations de la politique économique," Sciences Po publications info:hdl:2441/5221, Sciences Po.
    21. Juan P Trevino, 2011. "Oil-Price Boom and Real Exchange Rate Appreciation; Is there Dutch Disease in the Cemac?," IMF Working Papers 11/268, International Monetary Fund.
    22. Alexius, Annika, 2000. "Supply Shocks and Real Exchange Rates," Working Paper Series 117, Sveriges Riksbank (Central Bank of Sweden).

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