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2 edition of Fiscal consolidations under fixed exchange rates found in the catalog.

Fiscal consolidations under fixed exchange rates

Paola Caselli

Fiscal consolidations under fixed exchange rates

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Published by Banca d"Italia in Rome .
Written in English


Edition Notes

Statementby Paola Caselli.
SeriesTemi di discussione -- no. 336
ID Numbers
Open LibraryOL22448098M

Chapter 16 Fiscal Theory of Exchange Rates We now turn to the subject of international monetary economics. Specifically, we will consider the interaction of a fixed exchange rate system with fiscal policy. Exchange rate management is typically thought to be in the domain of monetary, not fiscal, Size: KB. Answer: D. Fiscal expansion under a fixed exchange rate shifts the DD schedule outward, thereby causing an increase in output and a decrease in the exchange rate. However, with an accompanying outward shift of the AA schedule, output increases, and the exchange rate shifts outward. This shifts the exchange rate outward to its initial point. 7.


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Fiscal consolidations under fixed exchange rates by Paola Caselli Download PDF EPUB FB2

Paola Casell, "Fiscal Consolidations under Fixed Exchange Rates," Temi di discussione (Economic working papers)Bank of Italy, Economic Research and International Relations Area. Handle: RePEc:bdi:wptemi:td__ Fiscal consolidation under fixed exchange rates Article (PDF Available) in European Economic Review 45(3) March with 88 Reads How we measure 'reads'Author: Paola Caselli.

Fiscal Policy with Fixed Exchange Rates. In this section we use the AA-DD model to assess the effects of fiscal policy in a fixed exchange rate system.

Recall from Chap that fiscal policy refers to any change in expenditures or revenues within any branch of the government. This means any change in government spending, transfer payments. (Curdia and Woodford, ; Canzoneri and others, ) and (iii) a fixed exchange rate and/or less scope for monetary policy to counter the fiscal contraction (see, e.g., Anderson and others, ).

Testing this hypothesis empirically needs data on line items, which are unavailable in our sample. Some countries have time and again challenged the received wisdom that fixed exchange rates induce fiscal discipline by pursuing fiscal expansion under currency pegs, while others have even allowed fiscal profligacy under a currency union.

Thus, a fundamental question. THE BALANCE OF PAYMENTS: FREE VERSUS FIXED EXCHANGE RATES Milton Friedman and Robert V. Roosa Published by American Enterprise Institute for Public Policy Research Troubled conversations among monetary authorities about the United States’ balance-of-payments problems have given proposals for free exchange rates scant, if any, Size: 3MB.

ADVERTISEMENTS: Fiscal expansion: Introduction: (i) In a closed economy fiscal expansion will lead to an increase in the real interest rate and decrease in investment ADVERTISEMENTS: (ii) In a small open economy fiscal expansion will lead to a trade deficit and appreciation in the real exchange rate, (iii) Similarly, in a large open economy, fiscal [ ].

Expansionary Fiscal Policy. Suppose the United States fixes its exchange rate to the British pound at the rate Ē $/£.This is indicated in Figure "Expansionary Fiscal Policy with a Fixed Exchange Rate" as a horizontal line drawn at Ē $/£.Suppose also that the economy is originally at a superequilibrium shown as point J with GNP at level Ysuppose the government decides to.

Fiscal Consolidations and Economic Growth undertaken under fixed exchange rates (the most relevant case for many Eurozone countries today) and two -- Finland and Sweden -- after floating the. The Traditional Argument. The traditional argument holds that fixed exchange rates encourage fiscal discipline.

This argument is steeped in a long tradition, going back at least a century, 4 according to which adhering to a specie Fiscal consolidations under fixed exchange rates book, or a stable currency, would be associated with sound money and predictable policies that would keep inflation under control and lead to fiscal restraint.

Expansionary Fiscal Policy. Suppose the economy is originally at a superequilibrium shown as point J in Figure "Expansionary Fiscal Policy in the AA-DD Model with Floating Exchange Rates".The original gross national product (GNP) level is Y 1 and the exchange rate is E $/£suppose the government decides to increase government spending (or increase transfer payments or decrease.

ADVERTISEMENTS: The following points highlight the Economic Policies under Floating Exchange Rates. The Policies are: 1. Expansionary Fiscal Policy 2. Monetary Policy 3. The Monetary Transmission Mechanism 4.

Trade Policy. Economic Policy # 1. Expansionary Fiscal Policy: If the government of a small open economy now adopts an expansionary fiscal policy in the shape of [ ].

Please Note: The Bureau of the Fiscal Service provides current and historical exchange rate information. We cannot provide advice on, or assistance with, investing in foreign currencies.

This report provides exchange rate information under Section of Public Law dated September 4, (22 USC (b)) which gives the Secretary of. Under fixed exchange rates, this mechanism cannot operate and the transmission channel depends on the monetary scheme.

If the two central banks cooperate, money market equilibrium can be attained with a redistribution of the existing money stock; with unilateral pegging, instead, in the short run the world money stock has to increase, bringing Cited by: under fixed exchange rates than under flexible, and that the difference is substantial: the estimated models imply that maintaining a fixed exchange rate raises the long-run fiscal multiplier by roughly a third.

• JEL Classification E62, F41 • Keywords: Fiscal Policy, Fixed or Flexible Exchange Rates. Introduction. The Appropriate Use of Monetary and Fiscal Policy under Fixed Exchange Rates 1 Robert A.

Mundell This paper deals with the problem of achieving internal stability and balance-of-payments equilibrium in a country that considers it inadvisable to alter the exchange rate or to impose trade controls. Fixed Exchange Rates and Foreign Exchange Intervention.

policies affect the economy under a fixed exchange rate. •Some causes and effects of balance of payments crises. Figure Fiscal Expansion Under a Fixed Exchange Rate Output, Y Exchange rate, E File Size: KB.

Expansionary Monetary Policy. Suppose the United States fixes its exchange rate to the British pound at the rate Ē $/£.This is indicated in Figure "Expansionary Monetary Policy with a Fixed Exchange Rate" as a horizontal line drawn at Ē $/£.Suppose also that the economy is originally at a superequilibrium shown as point F with original gross national product (GNP) level Y 1.

FIGURE 1 The effects of fiscal (a) and monetary (b) policy under flexible exchange rates If the country fixes its exchange rate the above argument is no longer valid. Under fixed exchange rates, the balance of payments will not be automatically brought into equilibrium.

Hence an increase in the net capital inflow in the case of a fiscal policy. Fiscal Policy under Fixed Exchange Rates Fiscal policy is more effective under fixed exchange rates 3 1.

Fiscal stimulus (increase spending; lower taxes increases aggregate demand (shifts DD to right) 2. But this causes initial appreciation (fall in E); equil is at 2. To protect the peg, CB must buy foreign assets with home currency. This File Size: KB.

Exchange Rates as Automatic Stabilizers • Floating exchange rates quickly eliminate the “fundamental disequilibriums” that had led to parity changes and speculative attacks under fixed rates.

– Figure shows that a temporary fall in a country’s export demand reduces that country’s output more under a fixed rate than a floating Size: KB. der fixed exchange rates and under floating exchange rates.

Hence, the multiplier differs across exchange rate regimes – but to a lesser extent than what earlier studies and the received wisdom suggests. Moreover, we confirm the finding of Ilzetzki et al. () whereby the dynamics of the ex-Cited by: FISCAL POLICY AND EXCHANGE RATE REGIMES economic output slows.

Automatic stabilizers can be greatly enhanced when a currency union has a unifi ed fi scal system that provides for automatic trans-fers from regions that are performing well to those that are not.

Fiscal Crises under Fixed and Floating Exchange Rates. -->In a fixed exchange rate regime, an expansionary fiscal policy is effective by stimulating spending, as long as the parallel expansionary monetary policy keeps exchange rates stable.

The financial crisis of resulted in extreme policy measures by the Federal Reserve. both under fixed and floating exchange rate; If it is capital immobility, fiscal policy is impotent under fixed exchange rate while it is strong under floating exchange rate (table 1).

Table 1. Effects of fiscal policy under different capital mobility Fixed exchange rate Floating exchange rate Perfect capital mobility Extremely strong impotent.

text book ***** (Perfect capital immobility)Fiscal Policy Under Fixed Exchange Rates. With perfect capital immobility, any fiscal stimulus initially increases Y and M (and also i), but because capital is immobile, a BOP deficit emerges, decreasing the money supply and increasing i further.

Hence, under fixed rates bad behavior today leads to punishment tomorrow. Under flexible rates bad behavior has costs as well. The difference is in the intertemporal distribution of these costs: flexible rates allow the effects of unsound fiscal policies to manifest themselves immediately through movements in.

The analysis is conducted under the assumption of three alternative monetary rules accompanying a given fiscal policy: (1) fixed exchange rates with passive monetary adjustment; (2) flexible exchange rates with fixed money stocks; and (3) fixed exchange rates with active domestic credit policies designed to hold international reserves by: 1.

Downloadable. As governments around the world contemplate slashing budget deficits, the "expansionary fiscal consolidation hypothesis" is back in vogue.

I argue that, as a statement about the short run, it should be taken with caution. Alesina and Perotti () and Alesina and Ardagna () (AAP) have argued that fiscal consolidations may be expansionary if implemented mainly by cutting. Fiscal Policy with Floating Exchange Rates In this section we use the AA-DD model to assess the effects of fiscal policy in a floating exchange rate system.

Recall from Chap that fiscal policy refers to any change in expenditures or revenues within any branch of the government. Table 2 presents summary statistics for the data set on which Eq. is estimated for the overall sample.

Average fiscal consolidation is approximately % of GDP, 29 and average large fiscal consolidation is % of GDP. Large consolidations range from % of GDP (Germany in and Portugal in ) to % of GDP (Portugal in and ).Author: Şenay Ağca, Deniz Igan. Monetary and Fiscal Policy with Flexible Exchange Rates William H.

Branson, Willem H. Buiter. NBER Working Paper No. (Also Reprint No. r) Issued in June NBER Program(s):International Trade and Investment, International Finance and Macroeconomics.

adjustment in a fixed exchange-rate system. With exchange rates fixed, the option of changing relative prices quickly via nominal exchange rate changes is not available.

Hence, real exchange-rate adjustments, when needed, must be achieved through changes in relative costs and prices. However, if wages and prices are not flexible.

This paper examines the use of monetary and fiscal policy in a small country model under floating exchange rates. The government attempts to achieve a target level of economic activity and either an investment spending (output composition) or current account target. However, a choice may have to be made between the latter two objectives because a trade-off exists between them as the Cited by: 1.

Two main themes of the book are that (1) politics can distort optimal fiscal policy through elections and through political fragmentation, and (2) rules and institutions can attenuate the negative effects of this dynamic. The book has three parts: part 1 (9 chapters) outlines the problems; part 2 (6 chapters) outlines how institutions and fiscal rules can offer solutions; and part 3 (4.

The World Economic Forum is an independent international organization committed to improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas. Incorporated as a not-for-profit foundation inand headquartered in Geneva, Switzerland, the Forum is tied to no political, partisan or national interests.

Fiscal Policy with Fixed Nominal Exchange Rates C"O'te d91voire Christophe Chamley and Hafez Ghanem Cote d'Ivoire's increase in debt in the s (from 30 percent of GDP to percent) did little for new investment, because the investment-GDP ratio barely compensated for inflation. The country's fiscal stance hurt the real exchange rate and.

exchange rates per se. In the l95Os and l96Os, United States policymakers were able to operate “as if” the economy they were dealing with was closed, not be-cause the Bretton Woods system was a fixed rate system, but because it was a dollar standard system.

As we now know, with the benefit ofFile Size: 1MB. A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies, or another measure of value, such as gold.

There are benefits and risks to using a fixed exchange rate system. A fixed exchange rate is typically used to. The authors conclude that significant variation in specific economic conditions and institutional environments across countries leads to very different responses to fiscal shocks of exchange rates, consumption, and current accounts.

Therefore, one cannot easily extend evidence from the United States or OECD countries to less-developed economies.

Fiscal policy will be effective under the fixed exchange rate regime with high capital mobility. Initial increment in interest rate as a result of fiscal expansion, will attract more capital inflows.

This capital inflow will be more than enough to finance higher imports resulting from higher income due to. Under fixed exchange rates: Fiscal expansion tends to have two effects: first, it increases incomes.

Second, it increases interest rates. Higher interest rates cause capital inflows - which increases demand for the domestic currency. Fiscal consolidation is important to any type of government fiscal policy that focuses on the elimination of debt.

In order for the policy to function properly, it must consider the total cost of essential expenses and identify ways to generate as much benefit from those purchases as possible.