Intertemporal Adjustment and Fiscal Policy Under a Fixed Exchange Rate Regime

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.

Bibliographic Details

Main Authors:	Aloy, Marcel, Moreno-Dodson, Blanca, Nancy, Gilles
Format:	Policy Research Working Paper biblioteca
Language:	English
Published:	World Bank, Washington, DC 2008-04
Subjects:	ABSENCE OF STERILIZATION, ACTUAL VALUES, ADJUSTMENT MECHANISM, AGGREGATE CONSUMPTION, BALANCE OF PAYMENTS, BUDGET DEFICIT, BUSINESS CYCLE, BUSINESS CYCLES, CAPITAL ACCUMULATION, CAPITAL INFLOW, CAPITAL INFLOWS, CAPITAL MOVEMENTS, CAPITAL STOCK, CASH BALANCE, CASH BALANCES, CENTRAL BANK, CONSUMER PRICE INDEX, CONSUMERS, CONSUMPTION PRICE INDEX, CONSUMPTION SPENDING, CONTROL VARIABLE, CORRELATION COEFFICIENTS, CREDIBILITY, CURRENCY, CURRENCY BOARD, CURRENCY BOARD ARRANGEMENT, CURRENCY BOARDS, CURRENCY CRISES, CURRENT ACCOUNT, CURRENT ACCOUNT DEFICIT, CURRENT ACCOUNT DEFICITS, CURRENT ACCOUNTS, DEBT SERVICE, DEPENDENT VARIABLE, DEPRECIATION, DEPRECIATION RATE, DERIVATIVE, DERIVATIVES, DEVELOPING COUNTRIES, DEVELOPMENT ECONOMICS, DISCOUNT RATE, DOMESTIC BANKING, DOMESTIC BANKING SYSTEM, DOMESTIC CONSUMPTION, DOMESTIC CREDIT, DOMESTIC GOOD, DOMESTIC GOODS, DOMESTIC INFLATION, DOMESTIC MONEY SUPPLY, DOMESTIC PRICES, DYNAMIC ANALYSIS, ECONOMETRIC ESTIMATES, ECONOMIC POLICY, ELASTICITY, ELASTICITY OF EXPORTS, EMERGING ECONOMIES, EQUATIONS, EQUILIBRIUM LEVEL, EXCHANGE RATE CRISES, EXCHANGE RATE FLUCTUATIONS, EXCHANGE RATE REGIMES, EXCHANGE RATE VOLATILITY, EXOGENOUS INCOME, EXPENDITURE, EXTERNAL COMPETITIVENESS, EXTERNAL DEBT, EXTERNAL INDEBTEDNESS, EXTERNAL SHOCK, EXTERNAL SHOCKS, FINANCIAL CRISIS, FISCAL BALANCE, FISCAL DEFICIT, FISCAL DISCIPLINE, FISCAL POLICIES, FISCAL POLICY, FISCAL THEORY, FIXED EXCHANGE RATE, FIXED EXCHANGE RATE REGIME, FIXED EXCHANGE RATES, FLOATING REGIMES, FOREIGN ASSETS, FOREIGN CURRENCY, FOREIGN DEBT, FOREIGN EXCHANGE, FOREIGN EXCHANGE RESERVES, FOREIGN INFLATION, FOREIGN INTEREST, FOREIGN INTEREST RATE, FOREIGN INTEREST RATES, FOREIGN LOANS, FOREIGN RATE, FOREIGN REAL INTEREST RATE, FOREIGN REAL INTEREST RATES, GDP, GOLD, GOLD STANDARD, GOVERNMENT BUDGET, GOVERNMENT CONSUMPTION, GOVERNMENT DEBT, GOVERNMENT REVENUES, GOVERNMENT SPENDING, GROWTH RATE, GROWTH RATES, HARD PEG, HOME COUNTRY, IMBALANCES, IMPACT ON PRICE, IMPERFECT CAPITAL MOBILITY, IMPORTS, INDEBTEDNESS, INFLATION, INFLATION ANCHORS, INFLATION RATE, INFLATION RATES, INSTRUMENT, INTEREST RATE PARITY, INTEREST RATES, INTERMEDIATE REGIMES, INTERNATIONAL BANK, INTERNATIONAL ECONOMICS, INTERNATIONAL INFLATION, INTERNATIONAL MONETARY FUND, INTERNATIONAL PRICES, LIBERALIZATION, LIQUIDITY, LOCAL CURRENCY, LONG RUN EQUILIBRIUM, LONG-RUN EQUILIBRIUM, LONG-TERM CAPITAL, MACROECONOMIC ADJUSTMENT, MACROECONOMIC EVENTS, MACROECONOMIC FLUCTUATIONS, MACROECONOMIC MODEL, MACROECONOMIC STABILITY, MARGINAL PRODUCTIVITY, MARKET EQUILIBRIUM, MONETARY AUTHORITIES, MONETARY AUTHORITY, MONETARY DISCIPLINE, MONETARY MODEL, MONETARY POLICIES, MONETARY POLICY, MONETARY REGIMES, MONETARY UNIONS, MONEY DEMAND, MONEY GROWTH, MONEY MARKET, MONEY STOCK, MONEY SUPPLY, MULTIPLIERS, NOMINAL ANCHORS, NOMINAL EXCHANGE RATE, OPEN ECONOMIES, OPEN ECONOMY, OPTIMIZATION, OUTPUT, OUTPUT RATIO, PERMANENT SHOCK, POLITICAL ECONOMY, POPULATION GROWTH, POVERTY REDUCTION, PRICE STABILITY, PRIVATE CAPITAL, PRIVATE CONSUMPTION, PRODUCTION FUNCTION, PUBLIC ASSETS, PUBLIC CONSUMPTION, PUBLIC DEBT, PUBLIC DEFICIT, PUBLIC ECONOMICS, PUBLIC EXPENDITURES, PUBLIC SECTOR, PUBLIC SPENDING, PURCHASING POWER, PURCHASING POWER PARITY, RATE OF GROWTH, RATE OF INFLATION, REAL CONSUMPTION, REAL EFFECTIVE EXCHANGE RATE, REAL EXCHANGE RATE, REAL INTEREST, REAL INTEREST RATE, REAL TERMS, RECESSION, RELATIVE PRICE, RELATIVE PRICES, RISK PREMIUM, SAVINGS, SEIGNORAGE, SHORT-TERM CAPITAL, SLOWDOWN, STEADY STATE, STOCK CHANGE, STOCK RETURNS, SUPPLY CONSTRAINT, SURPLUS, TAX, TAX INCREASE, TAX RATE, TAX RATES, TIME HORIZON, TRADING, UTILITY FUNCTION, WEALTH, WITHDRAWAL, WORLD DEMAND,
Online Access:	http://documents.worldbank.org/curated/en/2008/04/9384583/intertemporal-adjustment-fiscal-policy-under-fixed-exchange-rate-regime http://hdl.handle.net/10986/6704
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