Fiscal stabilization and exchange rate instability
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.
|Date of creation:||31 Aug 1988|
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