Working Paper: CEPR ID: DP2692
Authors: Antonio Fatás; Andrew K. Rose
Abstract: This Paper is an empirical study of fiscal policy in countries with extreme monetary regimes. We study members of multilateral currency unions, dollarized countries that officially use the money of another country, and countries using currency boards. We find that belonging to an international common currency area is not associated with fiscal discipline; if anything, spending and taxes are higher inside currency unions. This effect is especially pronounced for dollarized countries that unilaterally adopt the currency of another country. Currency boards are associated with fiscal restraint.
Keywords: budget; empirical; government; panel; revenue; spending; tax
JEL Codes: E60; F30; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| currency boards (E42) | conservative fiscal policies (E62) |
| currency boards (E42) | smaller governments (H10) |
| currency boards (E42) | larger budget surpluses (H62) |
| unilateral currency unions (F36) | larger government sizes (H11) |
| unilateral currency unions (F36) | fiscal policy as a stabilizing mechanism (E63) |
| multilateral currency unions (F36) | fiscal discipline (E62) |
| loose fiscal policies (E62) | restrictive fiscal stance in multilateral currency unions (F36) |