Fiscal Policy and Exchange Rates
34 Pages Posted: 7 Mar 2003
Date Written: March 2003
This paper examines the dynamics of the nominal exchange rate and fiscal deficits in a continuous time optimizing general equilibrium model with finite horizon. It is shown that alternative financing modes of budget deficits imply different patterns of adjustment along the transitional path towards the steady state equilibrium. In particular, the respect of public solvency without money financing is not suffcient to avoid the depreciation of the exchange rate in the long-run after a fiscal expansion.
Keywords: Exchange Rates, Fiscal Deficits, Current Account Dynamics
JEL Classification: F31, F32, E62
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