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Fiscal Policies and Real Exchange Rates in the World Economy

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  • Jacob A. Frenkel
  • Assaf Razin

Abstract

This paper examines the effects of fiscal policies on the evolution of real rates of interest and real exchange rates in the interdependent world economy. We construct an analytical framework suitable for a detailed examination of the various channels through which these variables are influenced by government spending and by tax policies. The analytical framework employs a general equilibrium approach highlighting the roles played by wealth effects and by temporal and intertemporal substitution effects. The general principle illustrated by the analysis of the dynamic effects of budget deficits is that the consequences of temporary tax policies stretch beyond the period during which the temporary policies are in effect. The counterpart to these dynamic implications is the rise in the economy's external debt induced by the budget deficit the service of which stretches into the indefinite future. By series of examples, allowing for both distortionary and non-distortionary taxes and for various patterns of government spending, it is shown that the quantitative and qualitative effects of fiscal policies on real exchange rates, real interest rates, debt accumulation and the like depend critically on the commodity composition of government spending and its intertemporal allocations on the one hand, and on the details of government debt issue and tax structure, including the timing of taxes and borrowing and the types of taxes used to finance the budget, on the other hand.

Suggested Citation

  • Jacob A. Frenkel & Assaf Razin, 1986. "Fiscal Policies and Real Exchange Rates in the World Economy," NBER Working Papers 2065, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2065 Note: EFG ITI IFM
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    References listed on IDEAS

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    1. Buiter, Willem H, 1988. "Structural and Stabilization Aspects of Fiscal and Financial Policy in the Dependent Economy," Oxford Economic Papers, Oxford University Press, vol. 40(2), pages 220-245, June.
    2. Frenkel, Jacob A & Razin, Assaf, 1985. "Government Spending, Debt, and International Economic Interdependence," Economic Journal, Royal Economic Society, vol. 95(379), pages 619-636, September.
    3. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    4. Helpman, Elhanan & Razin, Assaf, 1987. "Exchange Rate Management: Intertemporal Tradeoffs," American Economic Review, American Economic Association, vol. 77(1), pages 107-123, March.
    5. William H. Branson & Jacob A. Frenkel, 1985. "Causes of Appreciation and Volatility of the Dollar with Comment by Jacob Frenkel," NBER Working Papers 1777, National Bureau of Economic Research, Inc.
    6. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
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    Citations

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    Cited by:

    1. Harry Huizinga & Søren Bo Nielsen, "undated". "Is Coordination of Fiscal Deficits Necessary?," EPRU Working Paper Series 98-05, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    2. Sebastian Edwards, 1987. "Anticipated Protectionist Policies, Real Exchange Rates and the Current Account," UCLA Economics Working Papers 437, UCLA Department of Economics.
    3. Andre Varella Mollick, 2016. "Adoption of the Gold Standard and Real Exchange Rates in the Core and Periphery, 1870–1913," International Finance, Wiley Blackwell, vol. 19(1), pages 89-107, April.
    4. Karl FARMER, "undated". "Public Debt Sustainability, Exchange Rates and Country-Specific Saving Rates," EcoMod2010 259600054, EcoMod.
    5. Sly, Nicholas & Weber, Caroline, 2015. "Global tax policy and the synchronization of business cycles," Research Working Paper RWP 15-7, Federal Reserve Bank of Kansas City.
    6. Karl FARMER & Jacopo ZOTTI, "undated". "Sustainable Government Debt in a Two-Country, Two-Good Overlapping Generations Model," EcoMod2009 21500030, EcoMod.
    7. Jung Young-Cheol & Quyen Nguyen V., 2012. "The Global Transmission of Government Debt," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-24, July.
    8. Bernardin Akitoby, 1997. "Termes de l'échange endogène et cycles économiques réels : une application à la Côte-d'Ivoire," Revue Économique, Programme National Persée, vol. 48(6), pages 1485-1508.
    9. Wesselbaum, D., 2013. "Procyclical Debt as Automatic Stabilizer," Working papers 444, Banque de France.
    10. Simarmata, Djamester A., 2007. "Keberlanjutan Fiskal di Indonesia
      [Fiscal Sustainability in Indonesia]
      ," MPRA Paper 41344, University Library of Munich, Germany.
    11. Karl Farmer, 2011. "Public-Debt Sustainability, Real Exchange Rate, and Country-Specific Saving Rates," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 17(1), pages 45-65, February.
    12. William H. Branson, 1988. "Sources of Misalignment in the 1980s," NBER Chapters,in: Misalignment of Exchange Rates: Effects on Trade and Industry, pages 9-38 National Bureau of Economic Research, Inc.
    13. Karl Farmer & Matthias Schelnast, 2013. "Public Debt Reduction in Advanced Countries and Its Impact on Emerging Countries," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 19(2), pages 167-188, May.

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