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Exchange-Rate Management Viewed as Tax Policies

  • Jacob A. Frenkel
  • Assaf Razin

The paper develops an analytical framework which demonstrates that the various forms of exchange-rate management are equivalent to corresponding tax policies. To highlight the salient issues, we consider two specific categories of exchange-rate policies. The first is a dual exchange-rate regime, which separates exchange rates for commercial and for financial transactions, and the second is a unified exchange-rate system in which the country unilaterally pegs its exchange rate at the same rate for all transactions. We show that the dual exchange rate policies can be usefully cast as distortionary taxes on international borrowing, and a unified pegged exchange-rate policies can be usefully cast as lump-sum tax cum subsidy policies. The equivalence between the various characteristics of exchange-rate management and tax management suggests that exchange-rate analysis could be usefully incorporated into the broader framework of the analysis of fiscal policies. A two-country model of the world economy is used to demonstrate the international transmission mechanism of these policies.

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File URL: http://www.nber.org/papers/w2653.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2653.

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Date of creation: Jul 1988
Date of revision:
Publication status: published as European Economic Review, Vol. 33, pp. 761-781, April 1989.
Handle: RePEc:nbr:nberwo:2653
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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Web page: http://www.nber.org
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  1. Adams, Charles & Greenwood, Jeremy, 1985. "Dual exchange rate systems and capital controls: An investigation," Journal of International Economics, Elsevier, vol. 18(1-2), pages 43-63, February.
  2. Persson, Torsten, 1984. "Real transfers in fixed exchange rate systems and the international adjustment mechanism," Journal of Monetary Economics, Elsevier, vol. 13(3), pages 349-369, May.
  3. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-94, June.
  4. Stockman, Alan C & Hernandez D, Alejandro, 1988. "Exchange Controls, Capital Controls, and International Financial Markets," American Economic Review, American Economic Association, vol. 78(3), pages 362-74, June.
  5. Rudiger Dornbusch, 1985. "Special Exchange Rates for Capital Account Transactions," NBER Working Papers 1659, National Bureau of Economic Research, Inc.
  6. Joshua Aizenman, 1986. "On the Complementarity of Commercial Policy, Capital Controls, and Inflation Tax," Canadian Journal of Economics, Canadian Economics Association, vol. 19(1), pages 114-33, February.
  7. Obstfeld, Maurice, 1986. "Capital controls, the dual exchange rate, and devaluation," Journal of International Economics, Elsevier, vol. 20(1-2), pages 1-20, February.
  8. Greenwood, Jeremy, 1983. "Expectations, the exchange rate, and the current account," Journal of Monetary Economics, Elsevier, vol. 12(4), pages 543-569, November.
  9. Alan C. Stockman, 1978. "A Theory of Exchange Rate Determination," UCLA Economics Working Papers 113, UCLA Department of Economics.
  10. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 865-90, October.
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