On the relevance of exchange rate regimes for stabilization policy

Adão, Bernardino; Correia, Isabel; Teles, Pedro

doi:10.1016/j.jet.2009.02.005

Cited by 42 publications

(45 citation statements)

References 28 publications

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“…Importantly, in Adao, Correia, and Teles (2009), since optimal policy is sensitive to the details of the environment, the fiscal instruments used will vary across environments and in general will require time-varying and firm-varying taxes, in contrast to the main results in our paper.…”

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confidence: 75%

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Fiscal Devaluations

Farhi

Gopinath

Itskhoki

2013

The Review of Economic Studies

148

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We show that even when the exchange rate cannot be devalued, a small set of conventional fiscal instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation in a dynamic New Keynesian open economy environment. We perform the analysis under alternative pricing assumptions-producer or local currency pricing, along with nominal wage stickiness; under arbitrary degrees of asset market completeness and for general stochastic sequences of devaluations. There are two types of fiscal policies equivalent to an exchange rate devaluation-one, a uniform increase in import tariff and export subsidy, and two, a value-added tax increase and a uniform payroll tax reduction. When the devaluations are anticipated, these policies need to be supplemented with a consumption tax reduction and an income tax increase. These policies are revenue neutral. In certain cases equivalence requires, in addition, a partial default on foreign bond holders. We discuss the issues of implementation of these policies, in particular, under the circumstances of a currency union. * We thank

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confidence: 75%

“…This paper is complementary to Adao, Correia, and Teles (2009) who show that the allocation in the flexible price, flexible exchange rate economy can be implemented with fiscal and monetary policies that induce stable producer prices and constant exchange rates.…”

mentioning

confidence: 83%

Fiscal Devaluations

Farhi

Gopinath

Itskhoki

2013

The Review of Economic Studies

148

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“…The reason is that a reduction in the international relative price of local final goods implies, via a substitution effect in preferences, an increase in world-and local-demand for the local composite good, which in turn increases local production. On the contrary, in our model, when the increase is on the price of the intermediate importable-relative to the intermediate exportable-the units of labor 5 See also Corsetti andPesenti (2001, 2005), Devereux and Engel (2003), Benigno and Benigno (2003), Duarte andObstfeld (2008), Ferrero (2005), and Adao, Correia, and Teles (2009) required to import one unit of the intermediate importable increases and is therefore contractionary. Second, in the model without traded commodities, a shock to the terms of trade does not change local costs, so it does not interact in an interesting way with the domestic price frictions.…”

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confidence: 73%

Optimal Devaluations

Hevia¹,

Nicolini²

2013

IMF Econ Rev

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The paper analyzes optimal policy in a simple small open economy model with price setting frictions. In particular, the paper studies the optimal response of the nominal exchange rate following a terms-of-trade shock. The paper departs from the New Keynesian (NK) literature in that it explicitly models internationally traded commodities as intermediate inputs in the production of local final goods and assume that the small open economy takes this price as given. This modification is not only in line with the long standing tradition of small open economy models, but also changes the optimal movements in the exchange rate. In contrast with the recent Small Open Economy NK literature, the model in this paper is able to reproduce the comovement between the nominal exchange rate and the price of exports, as it has been documented in the commodity currencies literature. Although the paper shows that there are preferences for which price stability is optimal even without flexible fiscal instruments, the model suggests that more attention should be given to the coordination between monetary and fiscal policy (taxes) in small open economies that are heavily dependent on exports of commodities. The model the paper proposes is a useful framework to study fear of floating. [JEL E52, F41, H21] IMF Economic Review (2013) 61, 22-51.

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“…Importantly, in Adao, Correia, and Teles (2009) since optimal policy is sensitive to the details of the environment the fiscal instruments used will vary across environments and in general will require flexibly time-varying and firm-varying taxes, in contrast to the main result in our paper. In addition, their implementation requires taxes both at Home and in Foreign.…”

Section: Introductionmentioning

confidence: 80%

“…In addition we find that only a small number of additional instruments are required to robustly implement fiscal devaluation under the fairly rich set of specifications we explore. This paper is complementary to Adao, Correia, and Teles (2009) who show that the allocation in the flexible price, flexible exchange rate economy can be implemented with fiscal and monetary policies that induce stable producer prices and constant exchange rates. 7…”

Section: Introductionmentioning

confidence: 83%

Fiscal Devaluations

Farhi¹,

Gopinath²,

Itskhoki³

2011

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We show that even when the exchange rate cannot be devalued, a small set of conventional fiscal instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation in a dynamic New Keynesian open economy environment. We perform the analysis under alternative pricing assumptionsproducer or local currency pricing, along with nominal wage stickiness; under arbitrary degrees of asset market completeness and for general stochastic sequences of devaluations. There are two types of fiscal policies equivalent to an exchange rate devaluation-one, a uniform increase in import tariff and export subsidy, and two, a value-added tax increase and a uniform payroll tax reduction. When the devaluations are anticipated, these policies need to be supplemented with a consumption tax reduction and an income tax increase. These policies are revenue neutral. In certain cases equivalence requires, in addition, a partial default on foreign bond holders. We discuss the issues of implementation of these policies, in particular, under the circumstances of a currency union.

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On the relevance of exchange rate regimes for stabilization policy

Cited by 42 publications

References 28 publications

Fiscal Devaluations

Fiscal Devaluations

Optimal Devaluations

Fiscal Devaluations

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