Welfare effects of fiscal policy under alternative exchange rate regimes: the role of the scale variable of money demand

Ingo Pitterle and Dirk Steffen

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates the implications of alternative scale variables of money demand for the comparison of a flexible exchange rate regime with a monetary union in a New Open Economy Macroeconomics setup. The welfare evaluation of exchange rate regimes esstentially depends on the exchange rate response under the flexible regime. When the scale variable is private consumption, a domestic fiscal expansion yields a depreciation of the domestic currency. The combined expenditure switching and terms-of-trade effects are beneficial to domestic households, who thus prefer a flexible exchange rate regime. However, when the scale variable is total absorption, the domestic currency appreciates and the welfare results are reversed.

Keywords: Fiscal Policy; New Open Economy Macroeconomics; Money Demand Specification; Flexible Exchange Rates; Monetary Union; Pricing-to-Market (search for similar items in EconPapers)
JEL-codes: F41 F42 (search for similar items in EconPapers)
Date: 2004-04, Revised 2004-10
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https://mpra.ub.uni-muenchen.de/13047/1/MPRA_paper_13047.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/13136/1/MPRA_paper_13136.pdf revised version (application/pdf)

Related works:
Working Paper: Welfare Effects of Fiscal Policy under Alternative Exchange Rate Regimes: The Role of the Scale Variable of Money Demand (2004)
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