Type of Publication: Article in Journal
Konsolidierung des Staatshaushalts und Wechselkurs
- Clausen, V.
- Title of Journal:
- Volume (Publication Date):
- 41 (1995)
- Number of Issue:
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The paper analyzes the implications of fiscal consolidation efforts for the real external exchange rate. In the model following Dornbusch (1976) augmented by an equation reflecting the evolution of government spending, it is shown that the fluctuations of the real external exchange rate will be the smaller, the more decisively policy makers reduce public deficits. On the other hand, all other macroeconomic variables exhibit more short-term variability. In the decision about the speed of fiscal consolidation, policy makers face a short-term tradeoff between real exchange rate and other macroeconomic stability.