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Welfare effects of fiscal policy under alternative exchange rate regimes: the role of the scale variable of money demand

  • Pitterle, Ingo A.
  • Steffen, Dirk

This paper investigates the implications of alternative scale variables of money demand for the comparison of a flexible exchange rate regime with a monetary union in a New Open Economy Macroeconomics setup. The welfare evaluation of exchange rate regimes esstentially depends on the exchange rate response under the flexible regime. When the scale variable is private consumption, a domestic fiscal expansion yields a depreciation of the domestic currency. The combined expenditure switching and terms-of-trade effects are beneficial to domestic households, who thus prefer a flexible exchange rate regime. However, when the scale variable is total absorption, the domestic currency appreciates and the welfare results are reversed.

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File URL: https://mpra.ub.uni-muenchen.de/13136/1/MPRA_paper_13136.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13047.

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Date of creation: Apr 2004
Date of revision: Oct 2004
Handle: RePEc:pra:mprapa:13047
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