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Say You Fix, Enjoy And Relax The Deleterious Effect Of Peg Announcements On Fiscal Discipline

  • Enrique Alberola

    (Banco de España)

  • Luis Molina

    (Banco de España)

  • Daniel Navia

    (Banco de España)

This paper explores the impact of actual exchange rate regimes on fiscal discipline, which we purportedly link to the effect of announcing the peg and to the availability of external funds. To stress this point, the focus of the analysis is emerging markets spanning from the beginning of the nineties, given the importance of financial integration in the last fifteen years and the centrality of external financing for these countries. We empirically show that announcing the pegs has deleterious effects on fiscal discipline, while ‘de facto’ pegs which have not been announced deliver superior fiscal outcomes. The evidence suggests that this is due to the initial positive credibility shock of the announcement, which allows for easier and less costly access to the financing of fiscal deficits in emerging countries.

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Paper provided by EconWPA in its series International Finance with number 0509001.

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Length: 38 pages
Date of creation: 01 Sep 2005
Date of revision:
Handle: RePEc:wpa:wuwpif:0509001
Note: Type of Document - pdf; pages: 38
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  14. Ricarda Demarmels & Andreas Fischer, 2003. "Understanding Reserve Volatility in Emerging Markets: A Look at the Long-Run," Working Papers 03.03, Swiss National Bank, Study Center Gerzensee.
  15. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
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