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Fiscal Policies and the Dollar/Pound Exchange Rate: 1870-1984

  • Vittorio U. Grilli
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    This paper investigates the consequences of fiscal policies for the exchange rate. After developing a simple theory of how government financing policies should effect the exchange rate, we test it using data on the dollar/pound exchange rate. Previous analyses have concentrated mainly on the past-Bretton Woods flexible exchange rate system, thus ignoring potentially useful information contained In fixed exchange rate periods or in previous flexible exchange rate periods. This paper shows that it is theoretically proper and econometrically feasible to merge evidence from different nominal exchange rate systems. The gain of this procedure is that we can extend the sample period back to the 1870's. Our results suggest that permanent government expenditures are the only fiscal variables that significantly affected the dollar/pound nominal exchange rate. Budget deficits appear to be irrelevant in this respect.

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    File URL: http://www.nber.org/papers/w2482.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2482.

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    Date of creation: Jan 1988
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    Publication status: published as Grilli, Vittorio and Graciela Kaminsky. "Nominal Exchange Rate Regimes And The Real Exchange Rate: Evidence From The United States And Great Britain, 1885-1986," Journal of Monetary Economics, 1991, v27(2), 191-212.
    Handle: RePEc:nbr:nberwo:2482
    Note: ITI IFM
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    1. Grilli, Vittorio U., 1986. "Buying and selling attacks on fixed exchange rate systems," Journal of International Economics, Elsevier, vol. 20(1-2), pages 143-156, February.
    2. Evans, Paul, 1986. "Is the dollar high because of large budget deficits?," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 227-249, November.
    3. Martin Feldstein, 1986. "The Budget Deficit and the Dollar," NBER Working Papers 1898, National Bureau of Economic Research, Inc.
    4. Kimbrough, Kent P., 1986. "The optimum quantity of money rule in the theory of public finance," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 277-284, November.
    5. Robert J. Barro, 1986. "The Behavior of United States Deficits," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 361-394 National Bureau of Economic Research, Inc.
    6. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
    7. Greenwood, Jeremy, 1983. "Expectations, the exchange rate, and the current account," Journal of Monetary Economics, Elsevier, vol. 12(4), pages 543-569, November.
    8. King, Robert G. & Plosser, Charles I., 1985. "Money, deficits, and inflation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 147-195, January.
    9. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
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