IDEAS home Printed from https://ideas.repec.org/a/taf/intecj/v12y1998i2p17-34.html
   My bibliography  Save this article

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

Author

Listed:
  • 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]

Suggested Citation

  • 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
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/10168739800000011
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/10168739800000011?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Dornbusch, Rudiger, 1975. "A portfolio balance model of the open economy," Journal of Monetary Economics, Elsevier, vol. 1(1), pages 3-20, January.
    2. Dornbusch, Rudiger & Fischer, Stanley, 1980. "Exchange Rates and the Current Account," American Economic Review, American Economic Association, vol. 70(5), pages 960-971, December.
    3. 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.
    4. Devereux, Michael B. & Purvis, Douglas D., 1990. "Fiscal policy and the real exchange rate," European Economic Review, Elsevier, vol. 34(6), pages 1201-1211, September.
    5. Jeffrey Sachs, 1980. "Wages, Flexible Exchange Rates, and Macroeconomic Policy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 94(4), pages 731-747.
    6. William H. Branson & Willem H. Buiter, 1982. "Monetary and Fiscal Policy with Flexible Exchange Rates," NBER Working Papers 0901, National Bureau of Economic Research, Inc.
    7. Scarth, William M., 1979. "Bond financed fiscal policy and the problem of instrument instability," Journal of Macroeconomics, Elsevier, vol. 1(1), pages 107-117.
    8. Ahtiala, Pekka, 1987. "The effects of foreign disturbances under flexible exchange rates," Journal of International Money and Finance, Elsevier, vol. 6(4), pages 387-400, December.
    9. Ahtiala, Pekka, 1984. "A synthesis of the macroeconomic approaches to exchange rate determination," European Economic Review, Elsevier, vol. 24(2), pages 117-136, March.
    10. Ahtiala, Pekka, 1989. "A note on fiscal policy under flexible exchange rates," European Economic Review, Elsevier, vol. 33(7), pages 1481-1486, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    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. Ahtiala, Pekka, 2009. "When is money neutral under flexible exchange rates?," International Review of Economics & Finance, Elsevier, vol. 18(2), pages 318-326, March.
    3. Ahtiala, Pekka & Kanto, Antti, 2002. "Contractionary effects of expansionary fiscal policy: theory and tests," Economic Modelling, Elsevier, vol. 19(1), pages 137-152, January.
    4. Pekka Ahtiala, 1981. "Economic Policy in an Open Macro Model with Rational Labor Behavior," Discussion Papers 487, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    5. Wen-Ya Chang & Ching-Chong Lai, 2002. "The Policy Assignment Principle with Wage Indexation," The American Economist, Sage Publications, vol. 46(2), pages 80-87, October.
    6. Frenkel, Jacob A. & Mussa, Michael L., 1985. "Asset markets, exchange rates and the balance of payments," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 14, pages 679-747, Elsevier.
    7. Barry Eichengreen & Charles Wyplosz, 1986. "The Economic Consequences of the Franc Poincare," NBER Working Papers 2064, National Bureau of Economic Research, Inc.
    8. Bashir, Usman & Yu, Yugang & Hussain, Muntazir & Zebende, Gilney F., 2016. "Do foreign exchange and equity markets co-move in Latin American region? Detrended cross-correlation approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 462(C), pages 889-897.
    9. Eric Bleuze, 1988. "L'interdépendance des économies en change flexible : les apports d'une maquette dynamique," Post-Print hal-01304325, HAL.
    10. repec:spo:wpmain:info:hdl:2441/5386 is not listed on IDEAS
    11. van de Klundert, Theo C N J & van der Ploeg, Frederick, 1987. "Wage Rigidity and Capital Mobility in an Optimizing Model of a Small Open Economy," CEPR Discussion Papers 168, C.E.P.R. Discussion Papers.
    12. Obstfeld, Maurice & Stockman, Alan C., 1985. "Exchange-rate dynamics," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 18, pages 917-977, Elsevier.
    13. Joseba Luzarraga-Goitia & Marta Regúlez-Castillo & Arturo Rodríguez-Castellanos, 2021. "The dynamics between the stock market and exchange rates: Spain 1999–2015," The European Journal of Finance, Taylor & Francis Journals, vol. 27(7), pages 655-678, May.
    14. repec:hal:spmain:info:hdl:2441/5386 is not listed on IDEAS
    15. 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.
    16. Laffargue Jean-pierre, 1981. "Politiques budgétaire et monétaire en régime de changes flexibles," CEPREMAP Working Papers (Couverture Orange) 8126, CEPREMAP.
    17. Henri Sterdyniak & Éric Bleuze, 1988. "L'interdépendance des économies en change flexible : les apports d'une maquette dynamique," Revue Économique, Programme National Persée, vol. 39(5), pages 999-1034.
    18. Oscar Bajo Rubio, 1998. "Monetary and Fiscal Policies in Dynamic Models of the Open Economy," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 9806, Departamento de Economía - Universidad Pública de Navarra.
    19. 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.
    20. Pekka Ahtiala, 1988. "A Note on Fiscal Policy Under Flexible Exchange Rates," Discussion Papers 797, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    21. Zervoyianni, Athina, 1996. "Product-market openness and dynamic responses to exogenous shocks and policies in a two-country, two-goods model," International Review of Economics & Finance, Elsevier, vol. 5(3), pages 269-290.
    22. Hossein Askari & Noureddine Krichene & Abbas Mirakhor, 2014. "On the Stability of an Islamic Financial System," PSL Quarterly Review, Economia civile, vol. 67(269), pages 131-167.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:intecj:v:12:y:1998:i:2:p:17-34. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RIEJ20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.