Effects of Fiscal Contractions: The Importance of Preceding Exchange Rate Movements

Göran Hjelm

Scandinavian Journal of Economics, 2002, vol. 104, issue 3, 423-441

Abstract: We examine the importance of exchange rate and money supply movements for the macroeconomic outcome of fiscal contractions and find: (i) contractions associated with a favorable macroeconomic outcome have been preceded by significantly higher real depreciations as compared to contractions associated with a less favorable macroeconomic outcome and (ii) contractions preceded by real depreciations improve expectations about future income and generate higher private consumption growth. We discuss policy implications for countries both outside and inside the EMU. JEL classification: E21; E63; H30

Date: 2002
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