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Fiscal Policy, Expectations, and Exchange‐Rate Dynamics *
Author(s) -
Levin Jay H.
Publication year - 1994
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.1994.tb00027.x
Subject(s) - economics , adaptive expectations , exchange rate , rational expectations , distributed lag , futures studies , fiscal policy , monetary policy , lag , macroeconomics , econometrics , monetary economics , computer science , computer network , artificial intelligence
Abstract This paper uses the sticky‐price monetary model to analyze the effects of fiscal policy on the exchange rate under alternative assumptions about exchange‐rate expectations. the use of different expectations mechanisms‐specifically the perfect‐foresight model and the popular models tested by Frankel and Froot: regressive, adaptive, and distributed‐lag‐is based on recent empirical evidence suggesting that exchange‐rate expectations may not be rational. the most surprising finding in the paper is that with adaptive and distributed‐lag expectations, fiscal expansion has no initial impact on the exchange rate, and the same may be true for regressive expectations.