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Inter-American Development Bank
Office of the Chief Economist
Working Paper 303
Washington, D.C.
Fiscal Policy and the Choice of Exchange Rate Regime
Aaron Tomell* Harvard University and NBER
Andres Velasco* New York University and NBER
November 1994
© 1994
Inter-American Development Bank
1300 New York Avenue, N.W.
Washington, D.C. 20577
The views and interpretations in this document are those of the author and should not be attributed to the Inter-
American Development Bank, or to any individual acting on its behalf.
Conventional wisdom claims that fixed exchange rates provide more fiscal discipline
than do flexible rates, but the recent experience in Europe, the record of Sub-Saharan
countries in the 1980s and the history of stabilization attempts in Latin America cast
empirical doubts on this wisdom. We present a standard intertemporal model with perfect
capital mobility and price flexibility in which fiscal policy is endogenously determined
by a maximizing fiscal authority. The model shows that the difference between regimes
lies in the intertemporal distribution of the costs of fiscal laxity. Fixed rates push these
costs into the future, while flexible rates allow the effects of unsound fiscal policies to
manifest themselves immediately through movements in the exchange rate. Which
system provides more discipline depends on the authorities' discount rate.
* Preliminary work on this project was carried out while both authors visited the Office of the Chief
Economist of the Inter-American Development Bank, whose hospitality is gratefully acknowledged.
1. Introduction
The conventional wisdom claims that fixed rates provide more discipline than do flexible exchange rates -be it discipline against
loose monetary policies, high fiscal spending, or excessive wage demands.
1
This claim stresses that under fixed rates the
adoption of lax fiscal policies or the pursuit of high wages by unions must eventually lead to balance of payments difficulties and
thus to an abandonment of the peg.2 Presumably, the eventual collapse of the fixed exchange rate would imply a big cost -loss of
face for the policymaker and an unavoidable cut in real wages for union leaders. In other words, undisciplined behavior today
would lead to a punishment tomorrow. If this deterrent is strong enough, the argument goes, unsustainable policies do not occur
in equilibrium.
There are theoretical and empirical problems with this kind of argument. Theoretically, it is unclear where the costs of
devaluation under fixed exchange rates come from, and why it is presumably less costly to have an equivalent depreciation under
floating rates. After witnessing the recent problems in the EMS and the popularity of refiationary measures adopted by devaluing
countries, it is reasonable to be skeptical about the magnitude of the alleged political costs of abandoning a peg.
Empirically, it is far from clear the evidence supports the conventional view. The mixed European experience of fiscal
convergence and real wage claims under the EMS is one possible source of skepticism.
3
Two other sets of experiences also cast
doubts on the disciplining power of fixed rates, particularly when applied to fiscal policy. Particularly striking is the recent
experience of Sub-Saharan African countries. Countries in the French Franc zone maintained fixed rates from 1948 until 1994,
while the other countries had variable exchange rates. In the late seventies sub-Saharan Africa experienced a sharp decline in
terms of trade, and the response of government spending was starkly different across both sets of countries. Between 1980 and
1984, countries with variable exchange rates on average reduced government spending by 5 percentage points of GDP, while this
ratio remained constant in French Franc zone countries!
The conventional wisdom is not supported either by the history of Latin American stabilization programs in the last quarter-
century: many exchange rate-based stabilizations have been notoriously unsuccessful in reducing the fiscal deficit. In a
representative sample we consider below, only one of the countries that,entered an exchange rate-based stabilization without a
previous fiscal consolidation managed to achieve it in the course of the program.
Conversely, several of the countries that entered a money-based stabilization without a previous fiscal adjustment managed to get
the deficit under control in the course of the program.
1 See Aghevli, Khan and Montiel (1991), Frenkel, Goldstein and Masson (1991), and Giavazzi and Pagano (1988) for statements of this
view.
2 In the case of fiscal policies, money financing of a deficit eventually must lead to a balance of payments crisis. In the case of wages,
if the real wage is set above the level that ensures long-run current account balance, then the resulting deficit will also eventually cause
balance of payments problems.
3See, for instance, Buiter, Corsetti and Roubini (1993) and Svensson (1993) .
In two recent papers (Tornell and Velasco 1994a and b) we concentrate on the issue of fiscal discipline, and show that the
conventional wisdom that fixed rates provide more discipline need net hold in a standard intertemporal optimizing model in
which fiscal policy is endogenously determined by a maximizing fiscal authority. On the contrary, we show that under flexible
rates there are mechanisms which can provide more fiscal discipline. Our argument is based on the observation that under
flexible rates imprudent behavior has costs as well. The difference with fixed rates is in the intertemporal distribution of these
costs. Under fixed rates unsound policies manifest themselves in falling reserves or exploding debts. Only when the situation
becomes unsustainable do the costs begin to bite. Flexible rates, by contrast, allow the effects of unsound policies to manifest
themselves immediately through movements in the exchange rate. The basic message of those papers is that fixed rates induce
more fiscal discipline than flexible rates only when fiscal authorities are sufficiently patient, so that future costs have enough
deterrent power. If fiscal authorities are impatient, on the other hand, flexible rates -by forcing the costs to be paid up-front-
provide more fiscal discipline.
4
Rather than summarizing the results in those two papers, here we simply present an extremely simple model that illustrates
some of the main points of the analysis. The pape~ is structured as follows. Section II introduces the model, solves for the
equilibrium fiscal policy and compares the outcomes under fixed and flexible rates. Section III offers some suggestive empirical
evidence, and section IV concludes.
2 A Simple Model
Wc consider a standard model of a small open economy with price flexibility and perfect capital mobility. The cconomy is
populated by a private sector and a government. We begin with a description of the private sector.
The representative private agent produces inelastically an amount y of a tradable good, which serves as numeraire. She can
store her wealth in an internationally traded bond, whose real value is denoted by ft, and in domestic money, whose nominal
outstanding stock is denoted by Mr. We will adopt the convention that asset stocks are chosen at the end of each period. Hence,
Mt is the stock nominal balances chosen at the end of period' t'and carried over to period t + 1. Assuming purchasing power parity
and letting the foreign price level be constant and equal to one we have that the nominal exchange rate is equal to the domestic
price level: Et = Pt. Real money balances are defined as mt =mt/Et.
4 Torrnell and Velasco (1994a) presents an infinite-horizon, continuous-time model and focuses, among other things, on the responsiveness of
fiscal policy to exogenous shocks under alternative exchange rate regimes. That paper also contains a more detailed analysis of the recent
experience of sub-Saharan Africa. Tornell and Velasco (1994b) presents a discretetime (two-period) model and focuses on the response of fiscal
policy to the introduction of exchange ratebased and money-based stabilization policies. The empirical evidence in that paper is drawn from
stabilization experiments in Latin America.
The world lasts two periods: 1 and 2, and the timing of transactions is as follows.
5
The agent enters period 1 with a stock of
real bonds fo and a stock of nominal money Mo. During period 1 she receives production income y, interest payments rfo and a
lump-sum transfer g from the government. She then pays taxes ry, (r E (0, 1)), consumes an amount c1, and chooses the holdings
of real money rn1 and of the bond f1 that she would like to carry over into period 2. During period 2 the agent uses all her
accumulated wealth (including the real value of outstanding money balances) again to pay taxes tyand to consume an amount c2.
During this period she does not receive any government transfers.
Defining r as the exogenous world real rate of interest, nt = Et – et – 1/Et as the rate of inflation and nominal dcvaluation,
and it = r + πt as the domestic nominal interest rate, the intertemporal budget constraint of the individual is
(1 +r) (fo +mo) +y(1 - r) + y (1 - r) + g = c~ + i~mo + c2 + 12m1 (2.1)
l+r l+r
which has the usual interpretation that the present value of expenditures must be equal to the present value of
income. The representative agent's objective function is
V1a = v(c1) + ( E/E-1) mo c-1/1 + v(c2) + (E/E –1) m1 c-1/c, e E (0,1) (2.2)
where v (ct) has the usual properties. Not~ice that the individual's discount rate is the same as the rate of interest. We have also
assumed e E (0, 1) to ensure that total monetary revenue is increasing in it, so that the economy is always on the sensible side of
the relevant Laffer curve.
We now turn to a description of the government, which consists of a Fiscal Authority (FA) and a Central Bank (CB). The
government enters period 1 with a stock of net external debt bo and with nominal monetary liabilities Mo. During period 1 it
transfers an amount g to the private agent and pays interest rbo on its net debt. It finances these expenditures with tax revenue Ty
and monetary revenue M1 – Mo/E1 = (m1 - mo) – m1mo, which includes both seigniorage and the inflation tax. Any resulting
deficit is covered by issuing more net debt. At time 2 the government must repay its outstanding debt (both real and monetary);
its only sources of income are tax revenue ry and the inflation tax. Since taxes are fixed, the exchange rate must adjust to insure
that the inflation tax is sufficient to balance government accounts. It follows that the government intertemporal budget constraint
is
(1 + r) (bo + mo) + g = ry + i1mo + ty +i2m1/1 + r (2.3)
_________________________
5We will refer to the time before the world starts as period 0. Policy announcements will be made at this time.
The FA has control over period l’s government transfers g, which it sets in order to maximize the following objective
function
Vfa = au(g) + (1 – a)[v(c1) + (e/e1)mo c-1/c + β {v(c1) +( E/E –1)m1 c-1/c}] (2.4)
where u(g) and v(c) have the usual properties, β is the FA's subjective discount factor, β E (0, 1), and α E (0, 1). The key feature
of this function is that government transfers g yield utility -political power, prestige, greater chances of reclection, etc.- to those
who control fiscal policy, and this element carries weight α in the FA's overall objective function. This is the "political"
distortion that leads the FA to set g at a positive level in equilibrium. At the same time, the FA also internalizes the objectives of
the representative individual, but discounts the future at a rate that need not coincide with the individual's.
6
The FA and the CB make decisions independently of one another. Since we want to concentrate on fiscal discipline as
opposed to monetary discipline, we restrict the CB to follow rules which are not the outcome of any optimization problem. Under
predetermined rates (PERS) the CB sets time l's nominal alevaluation rate π1 equal to some constant. Under flexible exchange
rates (FERS) it sets period l's growth rate of nominal money ρ1 = M1 – Mo/M1 equal to some constant. In both cases, and as in
Sargent and Wallace (1981) and Drazen (1984), inflation in period 2 just adjust to ensure the government's budget constraint is
met.
7
This is a key assumption: it is tantamount to assuming that the CB can only precommit its monetary or exchange rate
policy for a limited amount of time (in this case, one period). Alternatively, in Calvo's (1986a) terminology, the CB's
announcements suffer from "lack of credibility."
The timing of actions is as follows. At the end of period 0, the CB announces its monetary policy (Ρ1 or π1). After this the
FA announces g, the level of fiscal transfers that will take place at time 1. Given these announcements, the private agent chooses
mo, her desired time 1 real balances. Lastly, the CB transfers to the private agent the gains (or losses) so it made as a result of
movements in the exchange rate during period 0.
8
During period 1 the private agent selects c1 and m1, her desired real balances
for time 2. The FA does not make any decision.
9
Once time 2 arrives, the government repays its outstanding debt, the CB
redeems the real value of outstanding money balances, and the private agent consumes all her remaining wealth.
______________________
6Assuming this political distortion is just a shortcut. It could derived from first principles in many ways. One is to consider a situation
with heterogeneous agents and divided government, as in Aizenmann (1992) and Velasco (1993a and b).
7 It makes no difference whether in the second period the system operates under floating or fixing. For simplicity, we assume that the
exchange rate regime is not altered in the second period. Under PERS, this means that the rate of devaluation is simply adjusted to ensm'e enough
revenue is provided by the inflation tax. Under FERS the same thing happens, except that the necessary devaluation is market-driven.
8See below for an explanation of this transaction.
9 We have recquired that government decisions be taken prior to the private agent's decisons in order to avoid time inconsistency
problems. We are also assuming away price bubbles and other kinds of monetary indeterminacy under flexible rates.
Acting atomistically, the representative agent takes as given the announcement of g, and she chooses c1, c2, rno and m1 in
order to maximize 2.2, subject to 2.1. It is straightforward to show that the solution to this problem implies that consumption is
equal to national income each period and that therefore the current account is balanced. Furthermore, the resulting money
demand function is
M*t-1 = it-e, t = 1,2 (2.5)
We now turn to the problem faced by the FA. The key question is: in which case will the fiscal authority set g at a lower
level -under predetermined exchange rates or under flexible exchange rates? In setting g the FA must trade off benefits against
costs. The benefits of increasing g derive from the increased utility of transfers, and the costs derive from the fact that higher g
has to be financed with a higher inflation tax, which reduces equilibrium real balances in at least one, and maybe both, periods.
To determine which regime provides more discipline we need to find the effects of changes in g on inflation rates, and thus on mo
and mi. The difference between both regimes is in the intertemporal allocation of this increase in the inflation tax. Under PERS
π1 is predetermined by the CB. Thus mo remains unchanged, and any change in g just affects m1. Under FERS, on the other
hand, only Ρ1 is fixed by the CB, while inflation rates -and thus mo and m1- are endogenous and dependent on the choice of g.
Focus now on the case of PERS. Once the CB announces 7h and the FA announces g at the end of period 0, private agents
rearrange their portfolios by buying or selling domestic money from the CB. Let Mo-/Eo- = mo- and bo- be the levels of
real balances and net foreign assets outstanding before the policy announcements are made. The nominal exchange rate Eo-
is given by history and cannot jump under PERS. Portfolio rebalancing is accomplished through the following asset swap:
Mo-Mo-/Eo- = mo-mo- =- (bo – bo-). No capital losses or gains can occur in that case. Substituting this into budget
constrain 2.3 and using 2.5 to eliminate the it’s, we have
(1 + r) (bo- + mo-) + g = ry + mo c-1/c + ry = m1 c-1/c/ 1 + r (2.6)
so that the first term on the L.H.S. of is given by history.
Formally, under PERS the FA’s problem is to maximize 2.4 subject to 2.6 and the exchange rule chosen by the CB. The
solution to this problem is
u1(g*p) = (1 - α/α) (E/1 – E) β(1 + r) (2.7)
Focus now on the case of FERS. At the end of period 0 the CB announces Ρ1 and the FA announces g. Once again, and based on
their expectations of π1 that correspond to those announcements, agents attempt to rearrange their portfolios. The situation is
slightly more complex than under PERS, for the CB now does not intervene in the foreign exchange market, so that the market
can only clear as a result of an exchange rate movement at time zero. Let m*o be the stock of real balances agents want to hold
given the announcements. It must be the case that m*o = (1 - πo) mo-, with πo = Eo – Eo-/Eo. Hence, in this case private agents
experience a capital loss (gain) of magnitude πomo-
that has a counterpart in an equal gain (loss) for the government. Such an
effect on the government budget constraint was absent in the PERS case. In order to carry out a consistent comparison of
exchange rate regimes we offset this additional revenue-raising capacity of the government under FERS by assuming that at the
end of period 0 the government gives a rebate to agents equal to so = πomo-. Hence, under FERS the FA faces 2.6, the same
intertemporal budget constraint as under PERS.
Since π1 is now an endogenous variable, we need an extra equation to determine the system. From the definition of real
balances we get
m1(1 - Ρ1) = mo(1 - π1) (2.8)
Under FERS the FA’s problem is to choose g in order to maximize 2.4 subject to 2.5, 2.6, 2.8 and the CB’s chosen ρ1.
The solution to this problem is
u1(g*f) = (1 - α/α) β(1 + r) (E/1 – E)[1 + x/ 1 + xβ(1 + r)], x = (1/β)(i1/i2) [(1 - ρ1)/(1 + r) + (1-c/c)i1] (2.9)
Next we compare the level of g under PERS and FERS and consequently the amount of discipline provided by either
system. Note that the R.H.S. of 2.9 is equal to the R.H.S. of 2.7 multiplied by the term in square brackets. Note, furthermore, that
their ranking is solely a function of β(1 + r), where β is the discount factor and r is the interest rate. Since u”(g) < 0 by
assumption, it follows that g*pers
>
(<)g fers if and only if β (1 + r) < (>)1 and gPERS = g*fers if and only if β (1 + r) = 1.
To understand the intuition behind this result it is helpful to consider what the FA would do if it could control both monetary
and fiscal policy. Since real money balances mt-1 are inversely related to inflation πt, when the FA strongly discounts the future
(β(1 + r) < 1) its preferred time profile for the inflation tax is to shift it as much as possible to the future. In contrast, when the FA
does not discount the future much (β (1 + r) > 1), it prefers to endure the cost of raising resources through inflation in the present.
Finally, if β (1 + r) = 1, the FA is indifferent about the intertemporal allocation of the inflation tax burden.
If fiscal authorities strongly discount the future (β(1 + r) < 1), PERS implement an intertemporal distribution of the inflation
tax burden which is closer to the FA's preferred one. This implies that the marginal cost of financing an increase in g using
money financing is lower under PERS than under FERS. As a result, g*fers
>
g*pers. In contrast, when β (1 + r) > 1 the
opposite happens. FERS, which tilt the infiationary burden more heavily toward the initial period, come closer to replicating the
FA's preferred outcome. As a result, under FERS increasing g is less costly in terms of utility, and g*fers
<
g*pers.
These results suggest that one can think of exchange rate regimes as specific rules to distribute intertemporally the burden of the
inflation tax. Under predetermined rates, if the government increases the level of transfers the entire necessary increase in the
inflation tax is shifted to the future, while under flexible rates this necessary change is spread between the present and the future.
This is because, under FERS and rational expectations, higher money creation means higher inflation today, and not just
tomorrow. The less attractive the corresponding intertemporal allocation from the FA's point of view, the stronger the discipline.
In particular, when the FA discounts the future at a rate higher than the world rate of interest, flexible rates provide more
discipline.
3. Suggestive Evidence
In this section we present two sets of evidence that should cast some doubts on the conventional view that fixed exchange rates
provide more fiscal discipline than floating rates.
We first concentrate on the stabilization experience of Latin American countries. Table 1 lists a sample of stabilization
attempts in the last 25 years. While the list is not exhaustive on any account, it includes all the widely-studied high-inflation
stabilization experiences since 1970.
10
None Before Program During Program
Money-Based Brazil 1990
Chile 1975
Bolivia 1985
Peru 1990
Dominican Republic 1990
Exchange Rate-Based
Argentina 1979
Argentina 1985
Brazil 1986
Chile 1978
Uruguay 1979
Mexico 1987
Argentina 1991
Sources: Bruno, di Tella, Dornbusch and Fischer (1988), Medeiros (1993),
Bruno, Fischer, Helpman, Liviatan and Meridor (1991), Helpman and Leiderman (1988), Kiguel and Liviatan
(1988, 1989 and 1992), Vegh (1992) and Calvo and Vegh (1994)
Table 3.1: Stabilization and Fiscal Adjustment
10 See, for example, the well known volumes edited by Bruno, di Tena, Dornbusch and Fischer (1988) and Bruno, Fischer, Helpman,
Liviatan an and Meridor (1991), and the influential papers by Kiguel and Liviatan 1988 and 1992), Calvo (1986b), Vegh (1992) and Calvo and
Vegh (1994).
We classify episodes according to two criteria. One is whether the program was exchange rate-based or money-based. The
other is whether fiscal tightening occurred before the period of monetary stabilization, during the period, or not at all. Inevitably,
not all episodes lend themselves to clear-cut classification. Some episodes listed as money-based stabilizations (Chile 1974,
Bolivia 1985) did not display a clean exchange rate float, but rather a managed float or a policy of occasional mini-devaluations;
still, money provided the main nominal anchor. Evaluating the depth of fiscal adjustment is also tricky. Some episodes listed as
having had no fiscal adjustment (Argentina 1985, for example), did display some initial fiscal contraction; but this policy was
eventually reversed, and lack of sustained fiscal tightness is widely regarded as the main cause for a return to high inflation.
Finally, there are cases (in particular Argentina 1991) where some of the fiscal adjustment took place before the start of the plan,
but substantial further adjustment has taken place during implementation as well.11
The first fact that stands out is that only one (none if Argentina 1991 is classified as having had prior adjustment) of the
exchange rate-based programs that started out without a previous fiscal consolidation managed eventually to achieve it. This
suggests that there is little evidence in support of the idea that fixed rates per se induce fiscal discipline. The second noticeable
fact is that a majority of money-based attempts that started out without a previous fiscal consolidation succeeded in achieving it
in the course of the program. Of course, this evidence should be taken as simply suggestive. Many things happen during these
episodes, and it is difficult to isolate the effects that the exchange rate regime has on fiscal policy.
The recent experience of sub-Saharan African countries is also suggestive.
12
These countries can be classified in two
groups: those in the CFA franc zone, which maintained a fixed exchange rate with the French franc from 1948 until 1994. (we
will refer to them as PERS countries); and those with variable exchange rates (referred to as FERS countries). These countries are
roughly similar in other respects: their GDPs per-capita are comparable, and they arc mainly exporters of the same primary
commodities.
_______________________
11For a more detailed analysis of these experiences, including the corresponding fiscal data, see Tornell and Velasco
(1994b).
12For useful discussions, see Devarajan and Rodrik (1991) and Nashashibi and Bazzoni (1993).
During the 70's, positive shocks to the prices of major exports of
Sub-Saharan countries (oil, coffee and cocoa) led to
significant increases in government spending. These price hikes were reversed by the late 70's, and the enlarged levels of
spending became unsustainable. Although during the first half of the 80's the terms of trade of both groups of countries did not
change significantly, the policy and adjustment responses of both groups were starkly different. Table 2 shows that between 1980
and 1984 the fiscal deficit as a proportion of GDP declined by 3.3 percentage points in FERS countries, while it INCREASED
BY 1.3 points in PERS countries. The same tendency can be observed in current government expenditure, which declined by 2.3
percentage points of GDP in FERS countries, while it increased by 2.5 points in PERS countries. In Tornell and Velasco (1994a),
using cross-country data we regress measures of fiscal adjustment on changes in the terms of trade, initial debt, GDP per capita
and on a dummy for the exchange rate regime. The coefficients on the dummy always have the right sign and are significant for
three difi'crcnt specifications of fiscal adjustment. Hence, the data seem broadly compatible with the main prediction of our
model.
Conditions deteriorated in the second half of the 1980s, especially for the PERS countries. Between 1985 and 1989, the
terms of trade of the PERS declined by 25 percent, while those of the FERS declined by 10 percent. This finally forced
adjustment on the PERS: between 1985-86 and 1990-91 government expenditure fell by almost 4 pcrcentage points of GDP.
Government expenditure in the FERS, which had adjusted earlier, remained basically constant as a share of GDP. Ultimately the
fixed exchange rate proved unsustainable for the CFA countries: the peg to the French Franc established in 1948 fell prey to a
100 percent devaluation in January 1994.
4. Summary and Conclusions
This paper offers both theoretical reasons and some very preliminary empirical evidence suggesting that the convcn-t. ionnl
wisdom that fixed exchange rates provide more fiscal discipline is in need of revision.
On theoretical grounds, we argue that under limited Central bank autonomy or imperfect credibility the choice of exchange rate
regime is essentially a choice of when to collect inflation tax revenues. In turn, this choice defines the costs the fiscal authorities
mast pay if they want to increase spending and the deficit. If the fiscal authorities arc impatient, flexible rates provide more fiscal
discipline; the opposite is true if fiscal authorities are relatively patient.
Some preliminary evidence suggests that the conventional wisdom is at variance with the facts -at least in some regions of the
world. In Africa in the 1980s, countries in the CFA zone were notorioasly slow in undertaking fiscal adjastment. In Latin
America and elsewhere in the last quarter-century, it is hard to find a country that undertook and exchange rate-based
stabilization while still suffering from a fiscal problem and managed to correct this problem in the course of the program. The
same is not true of countries that undertook money-based stabilization programs.
References
[1] Aghevli, B. M. Khan and P. Montiel "Exchange Rate Policies in Developing Countries: Some Analytical Issues" IMF
Occasional Paper No. 78, March 1991.
[2] Aizenmann, J. "Competitive Externalities and the Optimal Seigniorage Segmentation" Journal of Money, Credit and
Banking, Volume 24, February 1992.
[3] Bruno, M. G. di Tella, R. Dornbusch and S. Fischer Inflation Stabilization,' The E~perience oflsrael~ Argentina, Brazil,
Bolivia and Mexico Cambridge: MIT Press, 1988.
[4] Bruno, M., S. Fischer, E. Helpman, N. Liviatan and L. Meridor (eds.) Lessons of Economic Stabilization and its Aftermath
Cambridge: MIT Press, 1991.
[5] Buiter, W., G. Corsetti and N. Roubini "Excessive Deficits: Sense and Non-Sense in the Treaty of Maastrich" Economic
Policy, No. 16, April 1993.
[6] Calvo, G. "Temporary Stabilization: The Case of Predetermined Exchange lhtes" Journal of Political Economy 1986a.
[7] __________"Fractured Liberalism: Argentina under Martinez de Hoz" Economic Development and Cultural Change,
1986b.
[8] __________ and C. Vegh "Inflation Stabilization and Nominal Anchors" ContemporaryEconomic Policy, Vol. 12,
April 1994.
[9] Devarajan, S. and D. Rodrik "Do the Benefits of Fixed Exchange Rates Outweigh their Costs? The Franc Zone h~ Africa"
Working Paper, The World Bank, 1991.
[10] Drazen, A."Tight Money and Inflation: Further Results" Journal of Monetary Economics, Vol. 15, 1984.
[11] Frenkel, J. M. Goldstein and P. Masson "Characteristics of a Successful Exchange Rate System" IMF Occasional Paper No.
82, July 1991.
[12] Giavazzi, F. and M. Pagano, "The Advantage of Tying One's Hands: EMS Discipline and Central Bank Credibility",
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[13] Kiguel, M. and N. Liviatan "Infiationary Rigidities and Orthodox Stabilization Policies: Lessons from Latin America" The
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University, 1994b.
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March 1993a.
[22] ____________"Are Balance of Payments Crises Rational?" mimeo, NYU, 1993b.
Table 3.2
Sub-Saharan Fiscal Performance
1980 1984
Primary Deficit
PERS 4.7 4.6
FERS 7.9 3.0
Total Deficit
PERS 6.5 7.8
FERS 9.6 6.3
Total Revenue
PERS 20.2 21.4
FERS 18.1 19.0
Current Expenditure
PERS 26.7 29.2
FERS 27.7 25.4
Interest Payments
PERS 1.8 3.1
FERS 1.6 2.3
Source: Sub-Saharan Fiscal Data Base from the IMF. All figures as percentage of GNP.
