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Fiscal Policy and Welfare under Different Exchange Rate Regimes

Author

Listed:
  • Østrup, Finn

    (Department of Finance, Copenhagen Business School)

Abstract
The article analyses how government spending is determined under different exchange rate regimes in the context of a small open economy. Assuming nominal wage contracts which last for one period and assuming a benevolent government which determines government spending to optimise a representative individual’s utility, it is demonstrated that there are differences between exchange rate regimes with respect to the level of government spending. These differences arise first because a rise in government spending affects macroeconomic variables differently under different exchange rate regimes, and second because the government’s inclination to expand government spending is affected by inflation which depends on the exchange rate regime. At low rates of inflation, the government is inclined to set a higher level of government spending under a fixed exchange rate regime than under a floating exchange rate regime in which the monetary authority optimises preferences which include an employment target and an inflation target. As government spending affects the representative individual’s utility, the choice of exchange rate regime has an impact on welfare.

Suggested Citation

  • Østrup, Finn, 2005. "Fiscal Policy and Welfare under Different Exchange Rate Regimes," Working Papers 2005-1, Copenhagen Business School, Department of Finance.
    • Handle: RePEc:hhs:cbsfin:2005_001
    as

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    File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7140
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    exchange rate regimes; fiscal policy; monetary union; inflation targeting;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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