Fiscal Discipline and Exchange Rate Regimes: Evidence From the Caribbean
IMF Working Papers, May 1, 2006
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- Fiscal Discipline and Exchange Rate Regimes: Evidence From the Caribbean
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Bibliographic details
- Authors: Rupa Duttagupta, Guillermo Tolosa
- Published: May 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451863796.001
Theoretical framework
- Fiscal agencies under a currency union with a fixed exchange rate can have the largest incentive to overspend or "free-ride" compared to those under other exchange rate regimes.
- Mechanism of free-riding:
- Ability to spread the costs of overspending in terms of the inflation tax across both time—given the fixed exchange rate—and space—given the currency union.
- In contrast, free-riding behavior does not arise under flexible regimes owing to the immediate inflationary impact of spending.
Empirical findings (15 Caribbean countries, 1983-2004)
- Fiscal stances in countries with fixed pegs and currency unions regimes demonstrate greater free-riding behavior than countries with more flexible regimes.
- Time period covered: 1983-2004.
- Geographic focus: 15 Caribbean countries.
Subjects and keywords
- Subjects: Conventional peg, Economic integration, Exchange rate arrangements, Fiscal policy, Fiscal stance, Foreign exchange, Monetary unions
- Keywords: aggregate government budget constraint, budget constraint, Caribbean, central bank, common currency, Conventional peg, currency unions, dislike inflation, ECCU country, ECCU member, ECCU member country, exchange rate, Exchange rate arrangements, exchange rate case, exchange rates, Fiscal policy, Fiscal stance, FPCU regime, inflation cost, Monetary unions, money growth, utility function, WP
Source: IMF Working Paper "Fiscal Discipline and Exchange Rate Regimes: Evidence From the Caribbean" by Rupa Duttagupta and Guillermo Tolosa, May 1, 2006 (Working Paper No. 2006/119, DOI: https://doi.org/10.5089/9781451863796.001).