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Exchange Rate Pegs, Fiscal Policy and Credibility

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  • Torben Andersen
  • Julia Chiriaeva

Abstract

In a fixed exchange rate regime, an exchange rate change can be a swift way to change the real exchange rate in the short run. Fiscal policy also affects relative prices, and fiscal policy response to various types of shocks can therefore be crucial for the credibility of an exchange rate peg. We develop a model within which fiscal policy plays a crucial role for ensuring the viability and thus credibility of an exchange rate peg. We use the insights of this model to take a closer look at Denmark, which has successfully pursued a fixed exchange rate policy since 1982. Copyright Springer Science+Business Media, LLC 2007

Suggested Citation

  • Torben Andersen & Julia Chiriaeva, 2007. "Exchange Rate Pegs, Fiscal Policy and Credibility," Open Economies Review, Springer, vol. 18(1), pages 53-76, February.
    • Handle: RePEc:kap:openec:v:18:y:2007:i:1:p:53-76
    DOI: 10.1007/s11079-007-9004-1
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    Cited by:

    1. Frömmel, Michael & Kruse, Robinson, 2015. "Interest rate convergence in the EMS prior to European Monetary Union," Journal of Policy Modeling, Elsevier, vol. 37(6), pages 990-1004.
    2. Schäfer, Wolf, 2010. "The future of the international exchange rate system," Discussion Papers 3/10, Europa-Kolleg Hamburg, Institute for European Integration.
    3. Andersson, Fredrik N. G. & Jonung, Lars, 2018. "Lessons for Iceland from the Monetary Policy of Sweden," Working Papers 2018:16, Lund University, Department of Economics.

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    More about this item

    Keywords

    Credibility; Exchange rate regimes; Fiscal policy; Target zones; The EMS crisis; F31; F33; F41;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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