Fiscal Consolidations Under Fixed Exchange Rates

P. Caselli

Working Papers from Banca Italia - Servizio di Studi

Abstract: We present the "fixed exchange rate" version of the Obstfeld and Rogoff model analyze the international transmission of fiscal policy shocks. It is shown that the welfare effects of an unanticipated contraction in government expenditure in the home country crucially depend on the way in which world money stock is set. If home authorities alone are responsible for pegging the exchange rate, a fiscal adjustment induces a decrease in the real interest rate, stimulates private consumption and limits the contraction in world output, compared with a situation in which a cooperative scheme is implemented. The model is then used to propose a new interpretation of recent events in the EU countries that have enacted restrictive fiscal policies while pegging their currencies to the DM.

Keywords: EXCHANGE RATE; SOCIAL WELFARE; FISCAL POLICY (search for similar items in EconPapers)
JEL-codes: F31 E62 H30 (search for similar items in EconPapers)
Date: 1998
View citations in EconPapers

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Access Statistics for this paper

More papers in Working Papers from Banca Italia - Servizio di Studi
Address: Banca d'Italia-Servizio Studi-Divisione Biblioteca e Pubblicazioni - Via N azionale, 91 -00184 Rome, Italy.
Contact information at EDIRC.
Series data maintained by Thomas Krichel ().