Recent empirical research into the macroeconomic effects of fiscal policy shocks has generated a puzzle. Both Keynesian and Real Business Cycle models predict that a fiscal expansion will lead to a real exchange rate appreciation. However, in almost all the countries that have been studied,...

The median developing country has had significantly higher inflation than the median advanced country since the early 1980s. A model is presented in which a developing country may reduce inflationary expectations by pegging its exchange rate to the currency of an advanced country (or a basket of...