Citation

Discussion Paper Details

Please find the details for DP87 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Fiscal Deficits, Exchange Rate Crises and Inflation

Author(s): Sweder van Wijnbergen

Publication Date: December 1985

Keyword(s): Crawling Peg Inflation, Exchange Rates Freeze and Government Budget Constraint

Programme Area(s): International Trade and Regional Economics

Abstract: The analysis focuses on the government budget constraint and the resolution of inconsistent implications of different policy instruments under that constraint. We show how, under floating exchange rates, external shocks or internal structural reforms may cause jumps in inflation and the exchange rate through their impact on the government budget. In order to achieve a sustainable reduction in inflation an exchange rate freeze or crawling peg is shown to require restrictions not only on domestic credit, but also on the rate of increase in interest-bearing public debt. We endogenize regime collapse by introducing rational speculation against the central bank, and show that if an exchange rate freeze collapses, post-collapse inflation will exceed the rate prevailing before the freeze started.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=87

Bibliographic Reference

van Wijnbergen, S. 1985. 'Fiscal Deficits, Exchange Rate Crises and Inflation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=87