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Effects of Fiscal Contractions: The Importance of Preceding Exchange Rate Movements
Author(s) -
Hjelm Göran
Publication year - 2002
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/1467-9442.00295
Subject(s) - economics , exchange rate , monetary economics , outcome (game theory) , fiscal policy , private consumption , consumption (sociology) , macroeconomics , microeconomics , social science , sociology
We examine the importance of exchange rate and money supply movements for the macroeconomic outcome of fiscal contractions and find: (i) contractions associated with a favorable macroeconomic outcome have been preceded by significantly higher real depreciations as compared to contractions associated with a less favorable macroeconomic outcome and (ii) contractions preceded by real depreciations improve expectations about future income and generate higher private consumption growth. We discuss policy implications for countries both outside and inside the EMU. JEL classification : E 21; E 63; H 30