Exchange-Rate-Based Stabilization with Endogenous Fiscal Response

30 Pages Posted: 20 Apr 2011

See all articles by Ernesto Talvi

Ernesto Talvi

Centro de Estudios de la Realidad Economica y Social (CERES)

Multiple version iconThere are 2 versions of this paper

Date Written: March 1996

Abstract

In the context of a perfect foresight, intertemporal optimizing, cash-in-advance model, this paper studies the dynamics of an inconsistent exchange rate-based stabilization policy that fixes the exchange rate without an underlying fiscal adjustment to ensure that the exchange rate policy is sustainable in the long run. The perception that the exchange rate policy is temporary leads to an initial expansion in consumption, and, since the model allows for distortionary taxes on consumption, to an endogenous increase in tax revenues large enough to eliminate the ex-ante fiscal deficit.

Suggested Citation

Talvi, Ernesto, Exchange-Rate-Based Stabilization with Endogenous Fiscal Response (March 1996). IDB Working Paper No. 268. Available at SSRN: https://ssrn.com/abstract=1815954 or http://dx.doi.org/10.2139/ssrn.1815954

Ernesto Talvi (Contact Author)

Centro de Estudios de la Realidad Economica y Social (CERES) ( email )

Antonio Costa 3476
11300 Montevideo
Uruguay
(5982)628-7703 / 628 76 44 (Phone)
(5982)622-0526 (Fax)

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