Wages, Flexible Exchange Rates, and Macroeconomic Policy

Wages, Flexible Exchange Rates, and Macroeconomic Policy*

In an open economy with a floaLing exchange rate, the efficacy of fiscal and monetary policy depends fundamentally on the wage-setting pnxiess. In the canonical models of Mundell and Fleming, monetary expansion raises output via an exchange rate depreciation, while fiscal expansion has no output effect. These results hold only when real wages can be altered by exchange rate movements; if the re...

Fiscal Policy and Exchange Rates ∗

This paper examines the dynamics of the nominal exchange rate and fiscal deficits in a continuous time optimising general equilibrium model with finite horizon. It is shown that alternative financing modes of budget deficits imply different patterns of adjustment and that fiscal policy may provide the nominal anchor for the exchange rate. Our major finding is that after a fiscal expansion the r...

Flexible exchange rates and insulation : A reexamination

Fiscal policy and real exchange rates

Firms with higher debt relative to its size and negative cash °ows have lower value in the market. Why not the same applies to a currency value of a country? This paper investigates this question and shows empirical evidence that indeed a lower degree of government's ̄scal solvency, represented by higher debt and lower surpluses, implies an real exchange rate depreciation. Empirical results als...

Robustness and Macroeconomic Policy

This paper considers the design of macroeconomic policies in the face of uncertainty. In recent years, several economists have advocated that when policymakers are uncertain about the environment they face and find it difficult to assign precise probabilities to the alternative scenarios that may characterize this environment, they should design policies to be robust in the sense that they mini...