Working Paper: CEPR ID: DP216
Authors: Rudiger Dornbusch
Abstract: The paper investigates four challenges to exchange rate stability in the coming years and explores their implications for macroeconomic and exchange rate policy. The first section explores the importance of seigniorage in financing the government budget in Southern European countries. The second issue concerns real interest rates. The third obstacle to exchange rate stability is the continuing, sizeable overvaluation of the dollar. The paper also discusses excess capital mobility and the rationality of exchange markets, and endorses the Tobin proposal for market segmentation.
Keywords: exchange rates; fiscal policy; seigniorage; european monetary system; dual exchange rate system
JEL Codes: 130; 430
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower inflation (E31) | higher debt accumulation (H63) |
| high real interest rates (E43) | excessive debt accumulation (F65) |
| high real interest rates (E43) | budget deficits (H62) |
| high real interest rates (E43) | insufficient nominal money growth (E49) |
| current overvaluation of the dollar (F31) | significant barrier to exchange rate stability (F31) |
| current overvaluation of the dollar (F31) | persistent U.S. external deficit (H62) |
| dual exchange rate system (F31) | mitigate effects of excessive capital mobility on exchange rates (F32) |