effects_of_fiscal

effects_of_fiscal - HAKAN YILMAZKUDAY ECO 641 TOPICS IN...

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HAKAN YILMAZKUDAY ECO 641 - TOPICS IN MONETARY ECONOMICS AND POLICY Topic 6 : EFFECTS OF THE FISCAL STRUCTURE ON MONETARY POLICY “Explain the relationship between the exchange rates and the implementation of fiscal policies in a less developed country.” Abstract This paper attempts to examine the effects of fiscal policies on the evolution of real exchange rates in the interdependent world economy. In the paper, it will be shown that the quantitative and qualitative effects of fiscal policies on real exchange rates depend critically on the commodity composition of government spending and its intertemporal allocations on the one hand, and on the details of government debt issue and tax structure, including the timing of taxes and borrowing and the types of taxes used to finance the budget, on the other hand.
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Effects of the Fiscal Structure on Monetary Policy 2 I. Introduction During the first half of the 1980s, changes in national fiscal policies were not coordinated and real exchange rates exhibited diverging trends and were subject to large fluctuations. The course of fiscal policies undertaken by the major industrial countries affected the rest of the world through the integrated goods and capital markets and resulted in increased concern in each country over policy measures taken in the rest of the world. In addition to the interactions among the major economies, the debt-ridden countries faced with high world interest rates adopted fiscal policy measures that influenced their competitive position and external debt accumulation. All of these developments raised the interest towards fiscal policies (Frenkel and Razin, 1986). According to Canzoneri et al , the fiscal theory of price determination implies that tighter forms of monetary integration cannot be maintained by the central bank and monetary policy alone; fiscal authorities have to lend their active support to these monetary endeavors. Their findings show the importance of fiscal policy in the recent policy regimes such as exchange rate, monetary or inflation targeting. A proper analysis of the effects of fiscal policies on the real exchange rates must indicate the timing and composition of fiscal policies. Accordingly, the analysis must specify the details of the commodity composition of government spending and its intertemporal allocations on the one hand, and the details of government debt issue and of the tax structure including the timing of taxes and borrowing and the types of taxes used to finance the budget; on the other hand. One of the implications of our analysis is that even though the real exchange rate which is at the center of our analysis is influenced by fiscal policies, it is not a
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Effects of the Fiscal Structure on Monetary Policy 3 policy instrument directly manipulated by governments. Rather, the real exchange rate may be viewed as a useful indicator for macroeconomic policies.
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effects_of_fiscal - HAKAN YILMAZKUDAY ECO 641 TOPICS IN...

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