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

  • Aaron Tornell
  • Andres Velasco

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.

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File URL: http://www.nber.org/papers/w5300.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5300.

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Date of creation: Oct 1995
Date of revision:
Handle: RePEc:nbr:nberwo:5300
Note: IFM
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  1. Kathryn M. Dominguez, 1991. "Do Exchange Auctions Work? An Examination of the Bolivian Experience," NBER Working Papers 3683, National Bureau of Economic Research, Inc.
  2. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
  3. Kiguel, Miguel A. & Liviatan, Nissan, 1992. "Stopping three big inflations (Argentina, Brazil, and Peru)," Policy Research Working Paper Series 999, The World Bank.
  4. Michael Bruno & Guido Di Tella & Rudiger Dornbusch & Stanley Fischer, 1988. "Inflation Stabilization: The Experience of Israel, Argentina, Brazil, Bolivia, and Mexico," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022796, June.
  5. Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1995. "The Collapse of the Mexican Peso: What Have We Learned?," Harvard Institute of Economic Research Working Papers 1724, Harvard - Institute of Economic Research.
  6. Michael W. Klein & Nancy P. Marion, 1994. "Explaining the Duration of Exchange-Rate Pegs," NBER Working Papers 4651, National Bureau of Economic Research, Inc.
  7. Calvo, Guillermo A, 1986. "Fractured Liberalism: Argentina under Martinez de Hoz," Economic Development and Cultural Change, University of Chicago Press, vol. 34(3), pages 511-33, April.
  8. Paul R. Masson & Morris Goldstein & Jacob A. Frenkel, 1991. "Characteristics of a Successful Exchange Rate System," IMF Occasional Papers 82, International Monetary Fund.
  9. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  10. Peter Montiel & Bijan B. Aghevli & Mohsin S. Khan, 1991. "Exchange Rate Policy in Developing Countries: Some Analytical Issues," IMF Occasional Papers 78, International Monetary Fund.
  11. Liviatan, Nissan, 1984. "Tight money and inflation," Journal of Monetary Economics, Elsevier, vol. 13(1), pages 5-15, January.
  12. Corbo, Vittorio & de Melo, Jaime, 1987. "Lessons from the Southern Cone Policy Reforms," World Bank Research Observer, World Bank Group, vol. 2(2), pages 111-42, July.
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