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Fiscal Discipline and the Choice of Exchange Rate Regime

Aaron Tomell and Andrés Velasco

No 1144, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: Conventional wisdom claims that fixed exchange rates provide more fiscal discipline than do flexible rates, but the recent experiences in Europe, the record of Sub-Saharan countries in the 1980s, and the history of stabilization attempts in Latin America cast empirical doubts on this wisdom. To explore this puzzle we present a standard intertemporal model with perfect capital mobility and price flexibility, in which fiscal policy is endogenously determined by a maximizing fiscal authority.

Keywords: WP-303 (search for similar items in EconPapers)
Date: 2010-12
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