Working Paper: NBER ID: w1255
Authors: Jeffrey Sachs; Charles Wyplosz
Abstract: This paper develops a framework for analyzing the effects of fiscal policy on the real exchange rate. The short-run impact of various types of fiscal measures are considered as well as the dynamics of adjustment to long-run steady states. The analysis and related simulations suggest that the effect of fiscal policy changes on the real exchange rate can vary widely and will depend closely on a number of structural features, including the degree of asset substitutability,the composition of government spending, and the initial size of the public debt and net external position.
Keywords: Fiscal Policy; Real Exchange Rate; Asset Substitutability
JEL Codes: F31; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal expansion (E62) | Short-run appreciation of the real exchange rate (F31) |
| Fiscal expansion (E62) | Long-run depreciation of the real exchange rate (F31) |
| Fiscal expansion (E62) | Excess demand for domestic goods (D12) |
| Low asset substitutability (G19) | Short-run depreciation of the real exchange rate (F31) |
| Low asset substitutability (G19) | Long-run appreciation of the real exchange rate (F31) |
| Fiscal expansion (E62) | Higher domestic interest rate (E43) |
| Higher domestic interest rate (E43) | Crowding out of private demand (E62) |