Welfare Effects of Fiscal Policy under Alternative Exchange Rate Regimes: The Role of the Scale Variable of Money Demand

Ingo Pitterle and Dirk Steffen

No 284, Tübinger Diskussionsbeiträge from University of Tübingen, School of Business and Economics

Abstract: This paper investigates the implications of alternative scale variables of money demand for the comparison of a flexible exchange rate regime with a monetary union in a NOEM setup. The welfare evaluation of exchange rate regimes depends on the exchange rate response under the flexible regime. When the scale variable is private consumption, a domestic fiscal expansion yields a depreciation. As the associated expenditure switching and terms-of-trade effects are beneficial to the domestic country, households prefer flexible exchange rates. However, when the scale variable is total absorption, we obtain an appreciation and the welfare results are reversed.

Keywords: Fiscal Policy; New Open Economy Macroeconomics; Money Demand Specification; Flexible Exchange Rates; Monetary Union; Pricing-to-Market (search for similar items in EconPapers)
JEL-codes: F31 F32 F41 F42 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (14)

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Working Paper: Welfare effects of fiscal policy under alternative exchange rate regimes: the role of the scale variable of money demand (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuedps:284

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