Welfare effects of fiscal policy under alternative exchange rate regimes: the role of the scale variable of money demand

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URI: http://nbn-resolving.de/urn:nbn:de:bsz:21-opus-18244
Dokumentart: WorkingPaper
Date: 2004
Source: Tübinger Diskussionsbeiträge der Wirtschaftswissenschaftlichen Fakultät ; 284
Language: English
Faculty: 6 Wirtschafts- und Sozialwissenschaftliche Fakultät
Department: Wirtschaftswissenschaften
DDC Classifikation: 330 - Economics
Keywords: Steuerpolitik , Wechselkurs
Other Keywords:
Fiscal Policy , New Open Economy Macroeconomics , Money Demand Specification , Flexible Exchange Rates , Monetary Union , Pricing-to-Market
License: http://tobias-lib.uni-tuebingen.de/doku/lic_ohne_pod.php?la=de http://tobias-lib.uni-tuebingen.de/doku/lic_ohne_pod.php?la=en
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This paper investigates the implications of alternative scale variables of money demand for the comparison of a flexible exchange rate regime with a monetary union in a NOEM setup. The welfare evaluation of exchange rate regimes depends on the exchange rate response under the flexible regime. When the scale variable is private consumption, a domestic fiscal expansion yields a depreciation. As the associated expenditure switching and terms-of-trade effects are beneficial to the domestic country, households prefer flexible exchange rates. However, when the scale variable is total absorption, we obtain an appreciation and the welfare results are reversed.

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