Working Paper: CEPR ID: DP322
Authors: George S. Alogoskoufis
Abstract: This paper presents an investigation of the relationship between fiscal policies, fundamental equilibrium real exchange rates and misalignments under fixed nominal exchange rate regimes like those proposed by McKinnon and supply-side fiscal policy. The medium-run effects operate mainly through the accumulation or decumulation of external assets. The analysis suggests that even temporary shifts in fiscal policy have permanent effects on fundamental equilibrium exchange rates and the natural rate of unemployment. In addition, because of differential inflation across countries, real exchange rates become misaligned in the short-run.
Keywords: exchange rates; fiscal policy; external balance; G5; interdependence
JEL Codes: 430
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expansionary fiscal policy (E62) | external debt (F34) |
| external debt (F34) | real exchange rate depreciation (F31) |
| real exchange rate depreciation (F31) | unemployment (J64) |
| expansionary fiscal policy (E62) | real exchange rate depreciation (F31) |
| expansionary fiscal policy (E62) | unemployment (J64) |
| expansionary fiscal policy (E62) | long-term economic outcomes (F69) |