Government policy with deficit financing,imperfect capital mobility and exchange rate effects on the supply side |
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| Affiliation: | 1. University of Tasmania, Hobart, TAS, Australia;2. CAMA, Australian National University, Canberra, ACT, Australia;3. New Zealand Treasury, Wellington, New Zealand;1. Department of Economics, University of Mississippi, Box 1848, University, MS 38677, United States;2. Department of Economics, Boston College, 140 Commonwealth Avenue, Chestnut Hill, MA 02467, United States;3. NBER, United States;1. National Engineering School of Gabes, Rue Omar Ibn-Elkhattab, 6029, University of Gabes, Tunisia;2. International Finance Group-Tunisia, University Tunis El Manar, Tunisia;3. Central Bank of Tunisia, Tunisia |
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| Abstract: | This paper examines the impact of monetary and fiscal policy when supply-side effects of prices as well as exchange rates are taken into account in an open economy macro model. Partial deficit financing and imperfect international capital movements are appropriately modelled. It is shown that the well known Mundell–Fleming result, that fiscal policy is completely ineffective under perfect capital mobility and flexible exchange rates, is significantly affected when exchange rate effects on the supply side are taken into account. The paper also shows that such effects significantly alter the effects of devaluation under fixed exchange rates. |
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