Fiscal Policy, Monetary Regimes and Current Account Dynamics

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. © 2012 by Stefan Hohberger and Bernhard Herz. All rights reserved. Any reproduction, publication and reprint in the form of a different publication, whether printed or produced electronically, in whole or in part, is permitted only with the explicit written authorization of the authors. Terms of use: Documents in AbstractThe serious current account imbalances which have developed within the euro area over the last decade are at the core of the current financial crisis. For the members of the currency union fiscal policy has gained in importance due to the loss of monetary policy as an autonomous policy instrument. Based on a small open economy DSGE model with fiscal feedback rules, we analyze dynamic macroeconomic responses in particular of the current account to different shocks under alternative exchange rate regimes. Our results indicate that entry into monetary union and the subsequent loss of national monetary policy make the economy more vulnerable to a productivity shock and leads to higher variability of the real exchange rate and the current account. On the contrary, for a risk premium shock, an entry into EMU implies lower variability of most macroeconomic variables, but a higher persistence in the adjustment process of the current account. For both shocks, a countercyclical fiscal response to the current account stabilizes most macroeconomic variables better than a conventional countercyclical response to output, independently of the underlying exchange rate regime. Stabilizing the current account via fiscal policy intervention comes at the price of higher variability of output in the short-run, however. JEL classification: E61, E62, E52, F41

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