Working Paper: NBER ID: w1800
Authors: Warwick J. McKibbin; Jeffrey Sachs
Abstract: Discontent with the functioning of the world monetary system has led to many proposals for international monetary reform. These proposals range from enhanced consultations under the current regime of floating exchange rates to a regime of fixed exchange rates, as proposed by Ronald McKinnon. In this paper we examine the implications of several alternative monetary arrangements for fiscal policy in the world economy. In particular we focus upon two issues. The first is the effects of alternative monetary arrangements on the international transmission of fiscal policy. The second is the implications of the alternative regimes for strategic aspects of fiscal policymaking.As is generally the case in the discussion of exchange regimes we find that the choice of the monetary system is crucially dependent upon the source and nature of the shocks hitting the world economy. In this paper we show that the monetary regime also has important implications for the transmission offiscal policy in the world economy and for the nature of the strategic games played by fiscal authorities. Rigid rules of the game, as under fixedexchange rates, do not necessarily eliminate the inefficient equilibriathat can occur when fiscal authorities behave non-cooperatively.
Keywords: monetary policy; fiscal policy; exchange rates; OECD; international economics
JEL Codes: E52; E62; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Choice of monetary system (E42) | Transmission of fiscal policy (F42) |
| Fixed exchange rate regimes (F33) | Negative transmission effects of fiscal expansions (E62) |
| U.S. fiscal expansion under dollar standard (E62) | Recessions in other economies (F44) |
| Floating exchange rate systems (F33) | Positive transmission effects of fiscal expansions (F42) |
| U.S. fiscal expansion (E62) | Increased output in Japan and OECD (O49) |
| Strategic behavior of fiscal authorities (H39) | Inefficiencies under non-cooperative policymaking (D72) |
| Rigid monetary frameworks (F33) | Alleviation of inefficiencies (D61) |
| Nature of economic shocks (E32) | Effectiveness of fiscal policy under different monetary regimes (E63) |