The Implications of Fiscal Conditions and Growing Internationalization for Monetary Policies and Financial Market Conditions

International Monetary Fund

No 1988/052, IMF Working Papers from International Monetary Fund

Abstract: The paper argues that the endogenous behavior of monetary authorities provides an important channel through which fiscal policy influences financial variables, and that growing internationalization has increased the sensitivity of financial conditions to fiscal policy. The core of the argument is that fiscal policy influences exchange rates, particularly to the extent that it affects the expected after-tax returns on capital located in different countries, and that the sensitivity of exchange rates to fiscal policy increases with growing internationalization. In addition, financial conditions reflect the actual and expected responses of the monetary authorities to exchange rates.

Keywords: WP; physical capital; fixed exchange rate system; capital goods; cost of capital; effects of measure; monetary policy strategy; reaction function; market participant; goods market; exchange rate movement; market expectation; goods price; tradable goods price; exchange rate effects of measure; exchange rate variability; Exchange rates; Stocks; Exchange rate adjustments; Income (search for similar items in EconPapers)
Pages: 32
Date: 1988-01-01
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