A note on fiscal policy under flexible exchange rates

Ahtiala, Pekka

doi:10.1016/0014-2921(89)90059-7

Cited by 11 publications

(6 citation statements)

References 5 publications

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“…In the literature, Sachs (1980), Ahtiala (1989, Devereux and Purvis (1990), Pitchford (1990), Lai (1994), andLawler (1996) explore the role of wage indexation rules on the robustness of policy effectiveness in the Mundell (1963) model. Missing from these studies is an analysis of alternative wage indexation schemes in the assignment problem.…”

Section: Introductionmentioning

confidence: 99%

The Policy Assignment Principle with Wage Indexation

Chang¹,

Lai²

2002

The American Economist

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This paper is the first attempt to examine the role of alternative wage indexation schemes in coordina tion between fiscal and exchange rate policies to achieve given desirable macroeconomic targets under fixed exchange rates with perfect capital mobility. By introducing an explicit specification of the supply side similar to Sachs (1980) and Pitchford (1990) into the Mundell (1963) framework, we show that the crucial factor determining whether the mixture of fiscal and exchange rate policies will successfully work to stabilize output and official foreign reserves is the degree of wage indexation. Furthermore, we also show that such a finding under fixed exchange rates is robust when the analysis shifts to the sys tem of a managed floating regime.

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Section: Introductionmentioning

confidence: 99%

The Policy Assignment Principle with Wage Indexation

Chang¹,

Lai²

2002

The American Economist

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“…In fact two recent papers, by Ahtiala (1989) and Devereux and Purvis (1990), point out that this particular qualification to the original result of Mundell is itself subject to challenge. Both papers define domestic real income in a manner analogously to their treatment of real money balances, that is, in terms of a general price index.…”

Section: Introductionmentioning

confidence: 99%

Real wage rigidity and anticipated fiscal policy

Lawler

1996

Journal of Economic Studies

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“…Let us also mention that if the opposite inequality holds in , then deficits may actually generate an economic contraction rather than an expansion. This has been examined in, for example, Ahtiala (1989), Giavazzi and Pagano (1990) and Ahtiala and Kanto (2002).…”

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confidence: 99%

Macroprudential Policies and Financial Stability*

2011

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This article attempts to assess to what extent the central bank or the government should respond to developments that can cause financial instability, such as housing or asset bubbles, overextended budgetary policies or excessive public and household debt. To analyse this question, we set up a simple reduced‐form model in which monetary and fiscal policy interact, and imbalances (bubbles) can occur in the medium‐run. Considering several scenarios with both benevolent and idiosyncratic policy‐makers, the analysis shows that the answer depends on a number of characteristics of the economy, as well as on the monetary and fiscal policy preferences with respect to inflation and output stabilisation. We show that socially optimal financial instability prevention should be carried out by: (i) both monetary and fiscal policy (sharing region) under some circumstances; and (ii) fiscal policy only (specialisation region) under others. There is, however, a moral hazard problem: both policy‐makers have an incentive to be insufficiently pro‐active in safeguarding financial stability and shift the responsibility to the other policy. Specifically, under a range of circumstances, we obtain a situation in which neither policy mitigates instability threats (indifference region). These results can be related to the build‐up of the current global financial crisis, and have strong implications for the optimal design of the delegation process.

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A note on fiscal policy under flexible exchange rates

Cited by 11 publications

References 5 publications

The Policy Assignment Principle with Wage Indexation

The Policy Assignment Principle with Wage Indexation

Real wage rigidity and anticipated fiscal policy

Macroprudential Policies and Financial Stability*

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