Fiscal Constraints of a Fixed Exchange Rate Regime

International Monetary Fund

No 1989/107, IMF Working Papers from International Monetary Fund

Abstract: The paper considers whether the implementation of a fixed exchange rate regime requires or implies binding constraints on fiscal policy. The main conclusions are that, from a country perspective, the effective constraint is on the degree of monetary financing, which bears an uncertain relationship to the size of the budget deficit; that, from a systemic perspective, the financial stability of the currency area can be ensured by making the monetary and fiscal authorities independent of one another; and that the case for coordination of fiscal policies—whatever its merits—is not enhanced by the creation of a fixed exchange rate regime.

Keywords: WP; government; country; hard currency; hard currency regime; financing constraint; hard currency policy; exchange rate regime; inflation rate; vis-à-vis DM; exchange rate stability; Conventional peg; Currencies; Exchange rate arrangements; Exchange rates; Europe (search for similar items in EconPapers)
Pages: 26
Date: 1989-01-01
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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1989/107

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