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Fiscal stabilization and exchange rate instability

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  • Feltenstein, Andrew
  • Morris, Stephen

Abstract

The aim of this paper is to examine the implications for certain key macroeconomic variables in relation to reductions in public spending. In particular, the paper looks at; the rate of inflation, the interest rate, and the rate of growth of real GNP. The paper develops an intertemporal general equilibrium model that is used to analyze reductions in government spending and the implications for the exchange rate and the balance of payments of these reductions. Section II gives a brief review of background literature and provides an intuitive explanation of our model. Section III formally derives the analytics of the model, while Section IV sketches a proof of the existence of an intertemporal equilibrium. Section V gives some policy simulations using Mexican data, and finally, Section VI concludes the paper.

Suggested Citation

  • Feltenstein, Andrew & Morris, Stephen, 1988. "Fiscal stabilization and exchange rate instability," Policy Research Working Paper Series 74, The World Bank.
  • Handle: RePEc:wbk:wbrwps:74
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    References listed on IDEAS

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    Cited by:

    1. Feltenstein, Andrew & Shah, Anwar, 1995. "General equilibrium effects of investment incentives in Mexico," Journal of Development Economics, Elsevier, vol. 46(2), pages 253-269, April.
    2. Benjamin, Nancy, 1996. "Adjustment and income distribution in an agricultural economy: A general equilibrium analysis of Cameroon," World Development, Elsevier, vol. 24(6), pages 1003-1013, June.
    3. Shah, Anwar, 1988. "Public infrastructure and private sector profitability and productivity in Mexico," Policy Research Working Paper Series 100, The World Bank.
    4. Feltenstein, Andrew & Shah, Anwar, 1991. "Tax policy options to promote private capital formation in Pakistan," Policy Research Working Paper Series 698, The World Bank.
    5. Buiter, Willem H., 1988. "Can Public Spending Cuts be Inflationary?," CEPR Discussion Papers 225, C.E.P.R. Discussion Papers.

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