Fiscal Constraints of a Fixed Exchange Rate Regime PDF Download
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Author: International Monetary Fund
Publisher: International Monetary Fund
ISBN: 1451946686
Category : Business & Economics
Languages : en
Pages : 26
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Book Description
The paper considers whether the implementation of a fixed exchange rate regime requires or implies binding constraints on fiscal policy. The main conclusions are that, from a country perspective, the effective constraint is on the degree of monetary financing, which bears an uncertain relationship to the size of the budget deficit; that, from a systemic perspective, the financial stability of the currency area can be ensured by making the monetary and fiscal authorities independent of one another; and that the case for coordination of fiscal policies—whatever its merits—is not enhanced by the creation of a fixed exchange rate regime.
Author: International Monetary Fund
Publisher: International Monetary Fund
ISBN: 1451946686
Category : Business & Economics
Languages : en
Pages : 26
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Book Description
The paper considers whether the implementation of a fixed exchange rate regime requires or implies binding constraints on fiscal policy. The main conclusions are that, from a country perspective, the effective constraint is on the degree of monetary financing, which bears an uncertain relationship to the size of the budget deficit; that, from a systemic perspective, the financial stability of the currency area can be ensured by making the monetary and fiscal authorities independent of one another; and that the case for coordination of fiscal policies—whatever its merits—is not enhanced by the creation of a fixed exchange rate regime.
Author: Ms.Betty C. Daniel
Publisher: International Monetary Fund
ISBN: 1451855451
Category : Business & Economics
Languages : en
Pages : 19
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Book Description
It is well known that the long-run viability of a fixed exchange rate regime imposes constraints on monetary policy. This paper shows that, in a model with forward-looking agents, short-run viability imposes a fiscal constraint. When policy change, which destroys long-run viability, also violates the fiscal constraint, collapse is instantaneous. Delayed predictable collapse requires satisfaction of the fiscal constraint.
Author: Betty Daniel
Publisher:
ISBN:
Category :
Languages : en
Pages : 18
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Book Description
It is well known that the long-run viability of a fixed exchange rate regime imposes constraints on monetary policy. This paper shows that, in a model with forward-looking agents, short-run viability imposes a fiscal constraint. When policy change, which destroys long-run viability, also violates the fiscal constraint, collapse is instantaneous. Delayed predictable collapse requires satisfaction of the fiscal constraint.
Author: Marcel Aloy
Publisher: World Bank Publications
ISBN:
Category : Currencies and Exchange Rates
Languages : en
Pages : 33
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Book Description
Abstract: The paper presents a dynamic model for small to medium open economies operating under a fixed exchange rate regime. The model provides a partial explanation of the channels through which fiscal and monetary policy affects the real exchange rate. An empirical investigation is conducted for the case of Argentina during the currency board period of 1991-2001. Empirical estimates show that fiscal policy may indeed be an efficient instrument for promoting macroeconomic stability insofar as it encourages convergence toward long-run equilibrium and alters the long-term balance between exports and consumption, both private and public. The simulation applied to Argentina shows that if the share of public spending in the economy is higher than the share of imports, an increase in the tax rate will stimulate capital stock slightly, at least in the short term, and depreciate the real effective exchange rate. In the long run, the fiscal policy affects the value of the real exchange rate and consequently external competitiveness.
Author: International Monetary Fund
Publisher: International Monetary Fund
ISBN: 9781557751331
Category : Business & Economics
Languages : en
Pages : 394
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Book Description
This collection of papers, edited by Victor Argy and Paul De Grauwe, examines issues surrounding the choice of exchange rate regime in smaller industrial countries. It contains a comprehensive summary by Jacques J. Polak.
Author: Mr.Yan Sun
Publisher: International Monetary Fund
ISBN: 1451850123
Category : Business & Economics
Languages : en
Pages : 32
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Book Description
Conventional wisdom has held that a fixed exchange rate regime induces more fiscal discipline, but Tornell and Velasco (1995, 1998) argue the opposite. Using a dynamic model with fragmented fiscal policymaking, this paper evaluates the two arguments in a single framework and shows that (1) future punishment against fiscal laxity exists under both fixed and flexible regimes; (2) fiscal authorities have a greater incentive to spend more today under fixed rates than under flexible rates; (3) in the presence of both factors above, fixed rates will induce more fiscal discipline only if the future punishment is sufficiently stronger than under flexible rates; and (4) neither fixed nor flexible rates could resolve the structural distortions caused by fragmented policymaking, and fiscal centralization needs to be undertaken to strengthen fiscal discipline.
Author: João Tovar Jalles
Publisher: International Monetary Fund
ISBN: 1475555784
Category : Business & Economics
Languages : en
Pages : 30
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Book Description
We look at the effect of exchange rate regimes on fiscal discipline, taking into account the effect of underlying political conditions. We present a model where strong politics (defined as policymakers facing longer political horizon and higher cohesion) are associated with better fiscal performance, but fixed exchange rates may revert this result and lead to less fiscal discipline. We confirm these hypotheses through regression analysis performed on a panel sample covering 79 countries from 1975 to 2012. Our empirical results also show that the positive effect of strong politics on fiscal discipline is not enough to counter the negative impact of being at/moving to fixed exchange rates. Finally, we use the synthetic control method to illustrate how the transition from flexible to fully fixed exchange rate under the Euro impacted negatively fiscal discipline in European countries. Our results are robust to a number of important sensitivity checks, including different estimators, alternative proxies for fiscal discipline, and sub-sample analysis.
Author: Selim Elekdag
Publisher: International Monetary Fund
ISBN:
Category : Business & Economics
Languages : en
Pages : 42
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Book Description
The debate about the appropriate choice of exchange rate regime is fundamental in international economics. This paper develops a small open-economy model with balance sheet effects and compares the performance of fixed and flexible exchange rate regimes. The model is solved up to a second-order approximation which allows us to address the issue of risk and welfare rigorously. The paper identifies threshold levels of the debt-to-GDP ratio above which fixed exchange rate regimes are welfare superior to monetary policy rules that imply flexible exchange rate regimes. The results suggest that emerging market economies that suffer from a relatively high level of indebtedness and are constrained in their pursuit of optimal monetary policy, could find it beneficial to opt for a fixed exchange rate regime.
Author: Michael D. Bordo
Publisher: International Monetary Fund
ISBN: 1451857764
Category : Business & Economics
Languages : en
Pages : 29
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Book Description
In this paper, I survey the issue of exchange rate regime choice from the perspective of both the industrial and emerging economies taking an historical perspective. I first survey the theoretical issues beginning with a taxonomy of regimes. I then examine the empirical evidence on the delineation of regimes and their macroeconomic performance. The penultimate section provides a brief history of monetary regimes in industrial and emerging economies. The conclusion considers the case for a managed float regime for today's emerging economies.
Author: George Alogoskoufis
Publisher: Cambridge University Press
ISBN: 9780521405270
Category : Business & Economics
Languages : en
Pages : 428
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Book Description
This book from the Centre for Economic Policy Research deals with the implications of the exchange rate regimes and capital flows of the 1990s for government macroeconomic policy-making and EC policy co-ordination.
