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Fiscal Policy and Exchange Rates

Barbara Annicchiarico
Journal of Economics
Vol. 89, No. 2 (November 2006), pp. 165-185
Published by: Springer
Stable URL: http://www.jstor.org/stable/41795433
Page Count: 21
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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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