Fiscal Policy and the Real Exchange Rate
This paper reconsiders some conventional notions about fiscal policy under flexible exchange rates using an extended version of the well-known Dornbusch "overshooting" model. Three widely-held views are challenged: 1) the Mundell-Fleming result that fiscal policy is ineffective under flexible exchange rates; 2) that real shocks (including fiscal policy) do not cause exchange rate overshooting; and 3) that real shocks are not important in explaining high exchange rate variability. In our model, output is affected by fiscal policy in the short and long run.
Year of publication: |
1984
|
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Authors: | Devereux, Michael ; Purvis, Douglas D. |
Institutions: | Economics Department, Queen's University |
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