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Fiscal Policy under Flexible Exchange Rates: When is Expansion Contractionary?

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  • Pekka Ahtiala

Abstract

In this paper the behaviour functions are specified to correspond to their foundations in closed-economy macrotheory . The demand for real money balances, in terms of the expenditure basket of goods, is specified as a function of income in terms of the same basket. Imports are specified as a function of expenditures, being functionally part of expenditures. The supply of labor is specified as a function of the expenditure price. Fiscal expansion, while expansionary in the real wage model, turns out to be expansionary, neutral, or contractionary in the money wage model depending on whether the income elasticity of the demand for money is smaller than, equal to, or greater than one, also in the long run. However, if interest payments on foreign securities are not smaller relative to the trade balance, many of the effects are reversed. Output and the exchange rate overshoot their steady-state levels in both cases. [E1, F41]

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  • Pekka Ahtiala, 1998. "Fiscal Policy under Flexible Exchange Rates: When is Expansion Contractionary?," International Economic Journal, Taylor & Francis Journals, vol. 12(2), pages 17-34.
    • Handle: RePEc:taf:intecj:v:12:y:1998:i:2:p:17-34
    DOI: 10.1080/10168739800000011
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    References listed on IDEAS

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    1. Stephen M. Goldfeld, 1973. "The Demand for Money Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(3), pages 577-646.
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    10. Ahtiala, Pekka, 1989. "A note on fiscal policy under flexible exchange rates," European Economic Review, Elsevier, vol. 33(7), pages 1481-1486, September.
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    1. Ahtiala, Pekka, 1998. "Monetary policy under flexible exchange rates: When is expansion contractionary?," International Review of Economics & Finance, Elsevier, vol. 7(4), pages 361-378.
    2. Pekka Ahtiala & Juha Junttila, 2020. "Finland’s great depression of the 1990s: Lessons about financial reform based on econometric macro evidence," Review of Financial Economics, John Wiley & Sons, vol. 38(S1), pages 188-209, March.
    3. Ahtiala, Pekka, 2009. "When is money neutral under flexible exchange rates?," International Review of Economics & Finance, Elsevier, vol. 18(2), pages 318-326, March.
    4. Chao, Chi-Chur & Hu, Shih-Wen & Lai, Ching-Chong & Tai, Meng-Yi & Wang, Vey, 2013. "Tariff-tax reform and exchange rate dynamics in a monetary economy," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 63-73.

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