Working Paper: NBER ID: w1590
Authors: Elhanan Helpman; Assaf Razin
Abstract: The management of the exchange rate is possible only if the government pursues a monetary-fiscal policy mix which is consistent with its exchange rate targets. In this paper with uncertainty concerning the length of individual life the real consequences of exchange rate management depend on the precise time pattern of the accompanying policies. We look at a stylized example of disinflation by means of exchange rate targetting with an initial overvalued currency and a delayed accompanying absorbtion policy. The result will be an intergenerational redistribution of welfare whereby spending rises during the initial period and falls during later periods, while the external debt rises in all periods.
Keywords: exchange rate management; intertemporal trade-offs; monetary policy; fiscal policy; welfare distribution
JEL Codes: F31; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Exchange rate management targeting an overvalued currency (F31) | Higher spending in initial periods (E62) |
| Exchange rate management targeting an overvalued currency (F31) | Reduced spending in future generations due to increased tax liabilities (H60) |
| Current generation benefits from capital gains of an overvalued currency (F31) | Future generations bear the burden of higher taxes (H22) |
| Exchange rate management (F31) | Real effects on consumption and debt (D12) |
| Exchange rate management (F31) | Reserve movements leading to real effects on consumption and debt (E21) |
| Greater initial overvaluation (G40) | Larger effects on future generations' spending (D15) |
| Longer delays in absorption policy (H22) | Larger effects on future generations' spending (D15) |
| Managed exchange rate (F31) | Real effects not neutralized by monetary policy (E49) |