Exchange Rates and Fiscal Adjustments: Evidence from the OECD and Implications for EMU

Luisa Lambertini and Jose Tavares ()

No 576, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: We study monetary and exchange-rate policies around successful and unsuccessful fiscal adjustments and find that successful adjustments are preceded by large nominal exchange rate depreciations, whereas unsuccessful adjustments are preceded by appreciations. Pre-adjustment depreciation is a significant and quantitatively important predictor of the success of adjustment. Our results are robust to the inclusion of other determinants of the success of adjustment and to the definition of the depreciation period, of the persistence of the adjustment, and of the exchange rate. Monetary policy does not affect the success of fiscal adjustments. This result is confirmed when the sample is divided into countries that follow a fixed exchange rate policy and those that do not: for both cases it is exchange rate depreciations that affect the likelihood of success. Our results suggest that the adoption of a single currency will make successful fiscal adjustments more difficult to attain within EMU.

Keywords: Exchange Rates; Monetary Policy; Fiscal Adjustments; Economic and Monetary Union. (search for similar items in EconPapers)
JEL-codes: E62 E63 F36 (search for similar items in EconPapers)
Date: 2003-08-01
New Economics Papers: this item is included in nep-eec and nep-ifn
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Citations: View citations in EconPapers (8)

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Journal Article: Exchange Rates and Fiscal Adjustments: Evidence from the OECD and Implications for the EMU (2005)
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