Publication: Intertemporal Adjustment and Fiscal Policy Under a Fixed Exchange Rate Regime
Date
2008-04
ISSN
Published
2008-04
Author(s)
Aloy, Marcel
Moreno-Dodson, Blanca
Nancy, Gilles
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.
Citation
“Aloy, Marcel; Moreno-Dodson, Blanca; Nancy, Gilles. 2008. Intertemporal Adjustment and Fiscal Policy Under a Fixed Exchange Rate Regime. Policy Research Working Paper No. 4607. © World Bank, Washington, DC. http://openknowledge.worldbank.org/entities/publication/4630c204-1790-5b68-9081-c23ee533d800 License: CC BY 3.0 IGO.”
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