Fiscal Deficits, Exchange Rate Crises and Inflation

49 Pages Posted: 23 Apr 2004

See all articles by Sweder van Wijnbergen

Sweder van Wijnbergen

Universiteit van Amsterdam; Tinbergen Institute; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: 1987

Abstract

The analysis focuses on the government budget constraint and the resolution of inconsistent implications of different policy instruments under that constraint. We show how, under floating exchange rates, external shocks or internal structural reforms may cause jumps in inflation and the exchange rate through their impact on the government budget. In order to achieve a sustainable reduction in inflation an exchange rate freeze or crawling peg is shown to require restrictions not only on domestic credit, but also on the rate of increase in interest-bearing public debt. We endogenize regime collapse by introducing rational speculation against the central bank, and show that if an exchange rate freeze collapses, post-collapse inflation will exceed the rate prevailing before the freeze started.

Suggested Citation

van Wijnbergen, Sweder, Fiscal Deficits, Exchange Rate Crises and Inflation (1987). NBER Working Paper No. w2130. Available at SSRN: https://ssrn.com/abstract=270361

Sweder Van Wijnbergen (Contact Author)

Universiteit van Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 4011 / 4203 (Phone)
+31-35-624 91 82 (Fax)

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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