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Fiscal Policy and Exchange Rates

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Abstract

This paper examines the dynamics of the nominal exchange rate and fiscal deficits in a continuous time optimizing general equilibrium model with OLG. 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 sufficient to avoid the depreciation of the exchange rate in the long-run after a fiscal expansion. In addition, money and tax financing generate opposite intergenerational reallocation of wealth.

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  1. Department of Economics, University of Rome ``Tor Vergata'', Via Columbia 2, 00133, Roma, Italy

    Barbara Annicchiarico

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  1. Barbara Annicchiarico
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Correspondence to Barbara Annicchiarico.

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Annicchiarico, B. Fiscal Policy and Exchange Rates. J Econ 89, 165–185 (2006). https://doi.org/10.1007/s00712-006-0212-8

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  • DOI: https://doi.org/10.1007/s00712-006-0212-8

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