Regional Currency Areas in Financial Globalization
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Regional Currency Areas in Financial Globalization

Edited by Patrick Artus, André Cartapanis and Florence Legros

This book is an up-to-date, authoritative and comprehensive analysis of the key issues and challenges facing regional currency area projects in the context of financial globalization. The authors focus on several central issues that emerged during the experiences of the 1990s and 2000s: exchange rate regimes and optimal currency area theory; exchange rate regimes in emerging countries, international capital markets and regional currency areas; EMU and the euro; exchange rate regimes in Central and Eastern Europe, Asia and Latin America; dollarization and the coordination of macroeconomic policies in the presence of regional currency areas.
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Chapter 13: Fiscal Policy and War of Attrition: The Case of Latin American Countries

Jean-Pierre Allégret and Marie-Noëlle Cales


Jean-Pierre Allégret and Marie-Noëlle Cales INTRODUCTION If monetary policy credibility has been the object of a large debate in the literature, it is not the case for fiscal policy credibility. Yet the analysis of the conduct of fiscal policy has been renewed in two directions. On the one hand, the Stability and Growth Pact in the European Union has showed the importance of the policy mix in a monetary union. On the other hand, studies on stabilization plans in Latin America – for instance Ter-Minassian and Schwartz (1997); Calvo and Végh (1998) – have stressed that the control of fiscal balances is an essential condition in the success of these plans. Monetary policy is not the only factor of inflation control. Indeed as demonstrated in numerous empirical studies, there is a long-term relationship between fiscal unbalances and inflation. To stabilize the expectation of inflation by the private agents, the authorities have to stabilize fiscal balances. In this chapter we study fiscal policy credibility by focusing on the stabilization of the fiscal balance. Since the early 1990s, Latin American countries have displayed strong fiscal consolidation. But as noticed by Ter-Minassian and Schwartz (1997, p. 10), the common characteristic of these countries ‘is perhaps the fact that they all failed to signal convincingly a fundamental change of the economic policy regime and therefore lacked credibility’. The main implication of the fiscal adjustment is to induce pro-cyclical fiscal policies which destabilize output. From our point of view such behaviour...

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