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Money-Based versus Exchange Rate-Based Stabilization with Endogenous Fiscal Policy

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  • Aaron Tornell
  • Andres Velasco

Abstract

We present a standard intertemporal model in which fiscal policy is determined by an optimizing but non-benevolent fiscal authority. If the fiscal authority is impatient, a money-based stabilization provides more fiscal discipline and higher welfare for the representative agent than does an exchange rate-based stabilization. Data for Latin American stabilizations in the last quarter-century seem to confirm the notion that stabilizing by using money rather than the exchange rate helps induce politicians to reduce the fiscal deficit.

Suggested Citation

  • Aaron Tornell & Andres Velasco, 1995. "Money-Based versus Exchange Rate-Based Stabilization with Endogenous Fiscal Policy," NBER Working Papers 5300, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:5300
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    Cited by:

    1. Lucotte, Yannick, 2012. "Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation," Economic Systems, Elsevier, vol. 36(4), pages 609-628.
    2. Eugenio Diaz Bonilla & Hector E. Schamis, 1999. "La economía política de las políticas de cambio en Argentina," Research Department Publications 3079, Inter-American Development Bank, Research Department.
    3. Juan Carlos Echeverry & Jorge Alexander Bonilla & AndrÔøΩs Moya, 2006. "Rigideces Institucionales Y Flexibilidad Presupuestaria: Los Casos De Argentina, Colombia, M√Âxico Y Per√Ö," Documentos CEDE 3475, Universidad de los Andes, Facultad de Economía, CEDE.
    4. Canavan, Chris & Tommasi, Mariano, 1997. "On the credibility of alternative exchange rate regimes," Journal of Development Economics, Elsevier, vol. 54(1), pages 101-122, October.
    5. Juan Carlos Echeverry & Jorge Alexander Bonilla & Andrés Moya, 2006. "Rigideces Institucionales y Flexibilidad Presupuestaria: Origen, Motivación y Efectos sobre el Presupuesto," IDB Publications (Working Papers) 9091, Inter-American Development Bank.
    6. Echeverry, Juan Carlos & Bonilla, Jorge Alexander & Moya, Andrés, 2006. "Rigideces Institucionales y Flexibilidad Presupuestaria: Origen, Motivación y Efectos sobre el Presupuesto," IDB Publications (Working Papers) 2303, Inter-American Development Bank.
    7. Andres Velasco, 1997. "Debts and Deficits with Fragmented Fiscal Policymaking," NBER Working Papers 6286, National Bureau of Economic Research, Inc.
    8. Guillermo J. Vuletin, 2004. "Exchange Rate Regimes And Fiscal Performance. Do Fixed Exchange Rate Regimes Generate More Discipline Than Flexible Ones?," Econometric Society 2004 North American Winter Meetings 474, Econometric Society.
    9. Mr. Vladimir Klyuev, 2001. "A Model of Exchange Rate Regime Choice in the Transitional Economies of Central and Eastern Europe," IMF Working Papers 2001/140, International Monetary Fund.
    10. repec:ezo:ezppap:wp22 is not listed on IDEAS
    11. Christian H. Fahrholz, 2007. "Bargaining for Costs of Convergence in the Exchange-Rate Mechanism II," Journal of Theoretical Politics, , vol. 19(2), pages 193-214, April.
    12. Juan Carlos Echeverry & Leopoldo Fergusson & Pablo QuerubÔøΩn, 2005. "Budget Inflexibility," Documentos CEDE 2070, Universidad de los Andes, Facultad de Economía, CEDE.
    13. Guillermo Javier Vúletin, 2002. "Regímenes Cambiarios y Performance Fiscal ¿Generan los Regímenes Fijos Mayor Disciplina que los Flexibles?," Department of Economics, Working Papers 042, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.
    14. Juan Carlos Echeverry & Leopoldo Fergusson & Pablo Querubin, 2004. "La Batalla Pol√Çtica Por El Presupuesto De La Naci√Ìn: Inflexibilidades O Supervivencia Fiscal," Documentos CEDE 2944, Universidad de los Andes, Facultad de Economía, CEDE.
    15. Mr. A. J Hamann & Mr. Alessandro Prati, 2002. "Why Do Many Disinflations Fail? the Importance of Luck, Timing, and Political Institutions," IMF Working Papers 2002/228, International Monetary Fund.
    16. Eugenio Diaz Bonilla & Hector E. Schamis, 1999. "The Political Economy of Exchange Rate Policies in Argentina," Research Department Publications 3078, Inter-American Development Bank, Research Department.
    17. Dalia Grigonyté, 2003. "Impact of Currency Boards on Fiscal Policy in Central and Eastern European Countries," Economic Change and Restructuring, Springer, vol. 36(2), pages 111-133, June.
    18. Özlem Aytaç, 2017. "Exchange Rate-Based Stabilizations: A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 31(3), pages 815-830, July.
    19. Chris Canavan & Mariano Tommasi, 1997. "Visibility and Credibility in the Political Economy of Reform," Boston College Working Papers in Economics 346., Boston College Department of Economics.
    20. Tomás Marinozzi & Mariano Fernández, 2020. "Una breve revisón sobre la literatura de las metas de inflación," CEMA Working Papers: Serie Documentos de Trabajo. 755, Universidad del CEMA.

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