Haushaltskonsolidierung und Wechselkurs. (Fiscal Consolidation and Exchange Rates. With English summary.)

In: Konjunkturpolitik, Jg. 41 (1995), S. 95-114
ISSN: 00233498
Zeitschriftenaufsatz / Fach: Wirtschaftswissenschaften
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.