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Fiscal Policies and the Dollar/Pound Exchange Rate: 1870-1984

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  • Vittorio U. Grilli

Abstract

This paper investigates the consequences of fiscal policies for the exchange rate. After developing a simple theory of how government financing policies should effect the exchange rate, we test it using data on the dollar/pound exchange rate. Previous analyses have concentrated mainly on the past-Bretton Woods flexible exchange rate system, thus ignoring potentially useful information contained In fixed exchange rate periods or in previous flexible exchange rate periods. This paper shows that it is theoretically proper and econometrically feasible to merge evidence from different nominal exchange rate systems. The gain of this procedure is that we can extend the sample period back to the 1870's. Our results suggest that permanent government expenditures are the only fiscal variables that significantly affected the dollar/pound nominal exchange rate. Budget deficits appear to be irrelevant in this respect.

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  • Vittorio U. Grilli, 1988. "Fiscal Policies and the Dollar/Pound Exchange Rate: 1870-1984," NBER Working Papers 2482, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2482
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    References listed on IDEAS

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    1. Kimbrough, Kent P., 1986. "The optimum quantity of money rule in the theory of public finance," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 277-284, November.
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    6. King, Robert G. & Plosser, Charles I., 1985. "Money, deficits, and inflation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 147-195, January.
    7. Greenwood, Jeremy, 1983. "Expectations, the exchange rate, and the current account," Journal of Monetary Economics, Elsevier, vol. 12(4), pages 543-569, November.
    8. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
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    Cited by:

    1. Vittorio U. Grilli, 1988. "Seigniorage in Europe," NBER Working Papers 2778, National Bureau of Economic Research, Inc.
    2. Maurice Obstfeld, 1989. "Dynamic Seigniorage Theory: An Exploration," NBER Working Papers 2869, National Bureau of Economic Research, Inc.

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