Fiscal Policy and the Predictability of Exchange Rate Collapse

It is well known that the long-run viability of a fixed exchange rate regime imposes constraints on monetary policy. This paper shows that, in a model with forward-looking agents, short-run viability imposes a fiscal constraint. When policy change, which destroys long-run viability, also violates the fiscal constraint, collapse is instantaneous. Delayed predictable collapse requires satisfaction of the fiscal constraint.
Publication date: October 1997
ISBN: 9781451855456
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Finance , Finance , Money and Monetary Policy , Money and Monetary Policy , exchange rate , present value , foreign exchange , fixed exchange rate , exchange reserves

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