Real Exchange Rate Effects of Fiscal Policy
By Jeffrey Sachs and Charles Wyplosz
ABSTRACT
This paper develops a framework for analyzing the effects of fiscal policy on the real exchange rate. The short—run impact of various types of fiscal measures are considered as well as the dynamics of adjustment to long—run steady states. The analysis and related simulations suggest that the effect of fiscal policy changes on the real exchange rate can vary widely and will depend closely on a number of structural features, including the degree of a set substitutability, the composition of government spending, and the initial size of the public debt and net external position.