Balance of payments crises and fiscal adjustment measures

Michael Frenkel and Martin Klein ()

Journal of Macroeconomics, 1991, vol. 13, issue 4, 657-673

Abstract: A model with optimizing firms and consumers is used to explore the effects of unannounced and preannounced fiscal adjustment policies that are intended to prevent an impending balance of payments crisis. It is shown that preannouncement unambiguously raises the required fiscal adjustment effort so that, from the government's point of view, "cold turkey" is the preferable policy. The effect of preannouncement on the private sector's adjustment cost is ambiguous since preannouncement induces an externality which may either benefit or harm the private sector, depending on the nature of the measure that is preannounced.

Date: 1991
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:13:y:1991:i:4:p:657-673

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