Pitterle, Ingo A. and Steffen, Dirk (2004): Welfare effects of fiscal policy under alternative exchange rate regimes: the role of the scale variable of money demand.
This is the latest version of this item.
Download (338kB) | Preview
This paper investigates the implications of alternative scale variables of money demand for the comparison of a flexible exchange rate regime with a monetary union in a New Open Economy Macroeconomics setup. The welfare evaluation of exchange rate regimes essentially depends on the exchange rate response under the flexible regime. When the scale variable is private consumption, a domestic fiscal expansion yields a depreciation of the domestic currency. The combined expenditure switching and terms-of-trade effects are beneficial to domestic households, who thus prefer a flexible exchange rate regime. However, when the scale variable is total absorption, the domestic currency appreciates and the welfare results are reversed.
|Item Type:||MPRA Paper|
|Original Title:||Welfare effects of fiscal policy under alternative exchange rate regimes: the role of the scale variable of money demand|
|Keywords:||Fiscal Policy; New Open Economy Macroeconomics; Money Demand Specification; Flexible Exchange Rates; Monetary Union; Pricing-to-Market;|
|Subjects:||F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F42 - International Policy Coordination and Transmission
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
|Depositing User:||Ingo A. Pitterle|
|Date Deposited:||04. Feb 2009 07:13|
|Last Modified:||12. Feb 2013 19:26|
Aoki, M. (1985): “Misadjustment to Anticipated Shocks: An Example of Exchange-Rate Response,” Journal of International Money and Finance, 4, 415–420.
Bergin, P. (2004): “One Money One Price? Pricing to Market in a Monetary Union,” European Economic Review, forthcoming.
Betts, C., and M. Devereux (2000): “Exchange Rate Dynamics in a Model of Pricing-to-Market,” Journal of International Economics, 50, 215–244.
Calvo, G. (1983): “Staggered Contracts in a Utility-Maximizing Framework,” Journal of Monetary Economics, 12, 383–398.
Carlstrom, C. T., and T. S. Fuerst (2001): “Real Indeterminacy in Monetary Models with Nominal Interest Rate Distortions,” Review of Economic Dynamics, 4, 767–789.
Carre, M., and F. Collard (2003): “Monetary Union: A Welfare Based Approach,” European Economic Review, 47, 521–552.
Chang, W., and C. Lai (1997): “The Specification of Money Demand, Fiscal Policy, and Exchange Rate Dynamics,” Journal of Macroeconomics, 19(1), 79–102.
Corsetti, G., and P. Pesenti (2000): “Welfare and Macroeconomic Interdependence,” mimeo, Federal Reserve Bank.
Coutinho, L. (2003): “Fiscal Policy in the New Open Economy Macroeconomics and Prospects for Fiscal Policy Coordination,” ENEPRI Working Paper Series, 21.
Elyasiani, E., and A. Nasseh (1994): “The Appropriate Scale Variable in the U.S. Money Demand: An Application of Nonnested Tests of Consumption versus Income Measures,” Journal of Business and Economics Statistics, 12, 47–55.
Fleming, M. (1962): “Domestic Financial Policies under Fixed and under Floating Exchange Rates,” International Monetary Fund Staff Papers, 9, 369–79.
Ganelli, G. (2003): “Useful Government Spending, Direct Crowding-out and Fiscal Policy Interdependence,” Journal of International Money and Finance, forthcoming.
Ganelli, G., and P. Lane (2002): “Dynamic General Equilibrium Analysis: The Open Economy Dimension,” Trinity College Dublin and CEPR, mimeo.
Hairault, J.-O., and F. Portier (1993): “Money, New-Keynesian Macroeconomics, and the Business Cycle,” European Economic Review, 37, 1533–1568.
Helpman, E. (1981): “An Exploration of the Theory of Exchange Rate Regimes,” Journal of Political Economy, 89, 865–90.
Kollmann, R. (2001a): “The Exchange Rate in a Dynamic-Optimizing Business Cycle Model with Nominal Rigidities: A Quantitative Investigation,” Journal of International Economics, 55, 243–262.
Kollmann, R.(2001b): “Explaining international comovements of output and asset returns: The role of money and nominal rigidities,” Journal of Economic Dynamics & Control, 25, 1547–1583.
Lucas, R. E. (1980): “Equilibrium in a Pure Currency Economy,” Economic Inquiry, 18, 203–220.
Lucas, R. E. J. (1982): “Interest Rates and Currency Prices in a Two-Country World,”Journal of Monetary Economics, 10, 336–60.
Mankiw, G. (1985): “Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly,” Quarterly Journal of Economics, 100, 529–539.
Mankiw, G., and L. Summers (1986): “Money Demand and the Effects of Fiscal Policies,”Journal of Money, Credit and Banking, 18, 415–429.
Mundell, R. (1963): “Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates,” Canadian Journal of Economics and Political Science, 29, 475–85.
Obstfeld, M., and K. Rogoff (1995): “Exchange Rate Dynamics Redux,” Journal of Political Economy, 103, 624–660.
Pitterle, I., and D. Steffen (2004a): “Fiscal Policy in a Monetary Union Model with Home Bias in Consumption,” mimeo, University of Frankfurt.
Pitterle, I., and D. Steffen(2004b): “Spillover Effects of Fiscal Policy under Flexible Exchange Rates,”Econometric Society 2004 Australasian Meetings"
Sargent, T. J. (1987): Dynamic Macroeconomic Theory. Harvard University Press, Cambridge.
Schmitt-Grohe, S., and M. Uribe (2000): “Price Level Determinacy and Monetary Policy under a Balanced-budget Requirement,” Journal of Monetary Economics, 45, 211–246.
Sriram, S. S. (2001a): “A Survey of Recent Empirical Money Demand Studies,” IMF Staff Papers, 47, 334–365.
Sriram, S. S.(2001b): “Theory of the Demand for Money: a Survey of the Literature,” The Indian Economic Journal, 49(1), 103–115.
Sutherland, A. (1996): “Exchange Rate Dynamics and Financial Market Integration,”CEPR Discussion Paper, 1337.
Thornton, D. (1988): “Should Consumer Expenditures be the Scale Variable in Empirical Money Demand Equations?,” Federal Reserve Bank of St. Louis Working Papers, 88-003.
Tille, C. (1999): “The Role of Consumption Substitutability in the International Transmission of Shocks,” mimeo, Federal Reserve Bank of New York.
Tille, C. (2001): “The Role of Consumption Substitutability in the International Transmission of Monetary Shocks,” Journal of International Economics, 53(2), 421–444.
Available Versions of this Item
Welfare effects of fiscal policy under alternative exchange rate regimes: the role of the scale variable of money demand. (deposited 28. Jan 2009 03:25)
- Welfare effects of fiscal policy under alternative exchange rate regimes: the role of the scale variable of money demand. (deposited 04. Feb 2009 07:13) [Currently Displayed]