Money-Based versus Exchange Rate-Based Stabilization with Endogenous Fiscal Policy

Aaron Tornell and Andres Velasco

No 5300, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We present a standard intertemporal model in which fiscal policy is determined by an optimizing but non-benevolent fiscal authority. If the fiscal authority is impatient, a money-based stabilization provides more fiscal discipline and higher welfare for the representative agent than does an exchange rate-based stabilization. Data for Latin American stabilizations in the last quarter-century seem to confirm the notion that stabilizing by using money rather than the exchange rate helps induce politicians to reduce the fiscal deficit.

Date: 1995-10
Note: IFM
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Citations: View citations in EconPapers (20)

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Working Paper: Money-Based Versus Exchange Rate-Based Stabilization with Endogenous Fiscal Policy (1995)
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