Fiscal Policy and the Predictability of Exchange Rate Collapse
October 1, 1997
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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:
Issue:
133
Series:
Working Paper No. 1997/133
Stock No:
WPIEA1331997
ISBN:
9781451855456
ISSN:
1018-5941
