Fiscal Policy and the Predictability of Exchange Rate Collapse

October 1, 1997

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

It is well known that the long-run viability of a fixed exchange rate regime imposes constraints on monetary policy. This paper shows that, in a model with forward-looking agents, short-run viability imposes a fiscal constraint. When policy change, which destroys long-run viability, also violates the fiscal constraint, collapse is instantaneous. Delayed predictable collapse requires satisfaction of the fiscal constraint.

Subject: Consumption, Conventional peg, Domestic credit, Exchange rates, International reserves

Keywords: credit creation, WP

Pages:
18
Volume:
1997
DOI:
https://doi.org/10.5089/9781451855456.001
Issue:
133
Series:
Working Paper No. 1997/133
Stock No:
WPIEA1331997
ISBN:
9781451855456
ISSN:
1018-5941

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