Fiscal discipline and the choice of a nominal anchor in stabilization

The conventional wisdom is that exchange rate-based stabilizations induce more fiscal discipline than money-based programs. The Latin American experience does not support this view. Among the major stabilization programs implemented since 1960, the mean increase in the primary balance-to-GDP ratio w...

Full description

Saved in:
Bibliographic Details
Published in:Journal of international economics 1998-10, Vol.46 (1), p.1-30
Main Authors: Tornell, Aarón, Velasco, Andrés
Format: Article
Language:English
Subjects:
Economic models
Economic stabilization
Economic theory
Exchange rate policy
Exchange rate regimes
Exchange rates
Fiscal discipline
Fiscal policy
Foreign exchange
Foreign exchange rates
Inflation
Monetary policy
Policy making
Stabilization policy
Studies
Welfare
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The conventional wisdom is that exchange rate-based stabilizations induce more fiscal discipline than money-based programs. The Latin American experience does not support this view. Among the major stabilization programs implemented since 1960, the mean increase in the primary balance-to-GDP ratio was 3.2 percentage points under money-based programs, as opposed to only 0.2 percentage points under exchange rate-based programs. We present a model – where fiscal policy is set by an optimizing but non-benevolent government – that replicates this stylized fact. If the policy maker is impatient, a money-based stabilization provides more discipline, and higher welfare for the representative agent, than does an exchange rate-based stabilization.
ISSN:0022-1996
1873-0353
DOI:10.1016/S0022-1996(97)00039-1