search query: @journal_id 1342 / total: 707
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| Author: | Cook, D. Devereux, M.B. |
| Title: | Capital inflows, fiscal discretion, and exchange rate policy |
| Journal: | European Economic Review
2006 : NOV, VOL. 50:8, p. 1975-1992 |
| Index terms: | fiscal policy capital flows exchange rates models |
| Language: | eng |
| Abstract: | In this paper, a model is developed of capital inflows (hereafter as: C-Ifs.) linked to the exchange rate (here as: ER.) regime (as: ERR.) because of endogenous fiscal policy (as: f-pol). The main point is that a hard peg is undesirable in the absence of commitment in f-pol. In face of a credible fixed ER., the fiscal authority subsidizes C-Ifs. The economy will engage in inefficiently high international borrowing (as: b-g.), ending up worse off than under capital market autarky. To eliminate the incentive to subsidize b-g., the monetary authority must follow a flexible ER. rule in which C-Ifs. lead to ER. appreciation. If f-pol. must be financed by money creation rather than direct taxation, then a fixed ER. rule may cause both over-b-g. and a subsequent ER. crisis. |
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