Exchange Rate Pegs, Fiscal Policy and Credibility |
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| Authors: | Torben M Andersen Julia Chiriaeva |
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| Institution: | (1) School of Economics and Management, University of Aarhus, Aarhus, Denmark;(2) CEPR, Aarhus, Denmark;(3) EPRU, Aarhus, Denmark;(4) IZA, Aarhus, Denmark |
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| Abstract: | In a fixed exchange rate regime, an exchange rate change can be a swift way to change the real exchange rate in the short
run. Fiscal policy also affects relative prices, and fiscal policy response to various types of shocks can therefore be crucial
for the credibility of an exchange rate peg. We develop a model within which fiscal policy plays a crucial role for ensuring
the viability and thus credibility of an exchange rate peg. We use the insights of this model to take a closer look at Denmark,
which has successfully pursued a fixed exchange rate policy since 1982.
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| Keywords: | Credibility Exchange rate regimes Fiscal policy Target zones The EMS crisis |
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