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Monetary Policy and Exchange Rate Behavior in the Fiscal Theory of the Price Level

Javier Andrés (), Fernando Ballabriga and Javier Valles
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Fernando Ballabriga: ESADE

No 4, Working Papers from Banco de España, Working Papers Homepage

Abstract: The fiscal theory of the price level has challenged the conventional view that monetary factors drive prices and exchange rates and has also provided a rationale for fiscal restrictions in a monetary union. This paper reviews the main results and compelling criticisms of this theory, analyzing the effects of monetary and fiscal shocks under a fiscal regime. We pay special attention to the determinants of the exchange rate and to the ways to eliminate the exchange rate indeterminacy that arise under interest rate peg.

Keywords: monetary policy; exchange rate; prices (search for similar items in EconPapers)
JEL-codes: F31 E52 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2000
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