Fiscal policy under alternative exchange rate regimes [Elektronische Ressource] : on the specification of money demand in new open economy macroeconomics / vorgelegt von Dirk Steffen

FISCAL POLICY UNDER ALTERNATIVE
EXCHANGE RATE REGIMES
ON THE SPECIFICATION OF MONEY DEMAND IN
NEW OPEN ECONOMY MACROECONOMICS
Inaugural-Dissertation
zur Erlangung des Doktorgrades
an der Wirtschaftswissenschaftlichen Fakult at
der Eberhard-Karls-Universit at Tubingen?
vorgelegt von
Dirk Steffen
aus Bielefeld
2005Dekan: Prof. Dr. J org Baten
Erstkorrektor: Prof. Dr. Uwe Walz
Zweitkorrektorin: Prof. Dr. Claudia Buch
Tag der mundlic? hen Prufung:? 8. April 2005
iiTo Winfried Steffen
iiiivTable of Contents
Table of Contents v
List of Tables vii
List of Figures viii
1 Introduction 1
2 Preliminaries 7
2.1 Fiscal Policy in NOEM Models . . . . . . . . . . . . . . . . . . . . . 7
2.2 Money Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.2.1 Money in General Equilibrium Models . . . . . . . . . . . . . 12
2.2.2 Empirical Studies of Money Demand . . . . . . . . . . . . . . 14
2.2.3 Scale Variables and the Exchange Rate Response . . . . . . . 16
3 Fiscal Policy in Money-in-the-Utility Models 19
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.2 MIU under Flexible Exchange Rates . . . . . . . . . . . . . . . . . . 20
3.2.1 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.2.2 Positive Analysis of Fiscal Shocks . . . . . . . . . . . . . . . . 32
3.2.3 Welfare of Fiscal Shocks . . . . . . . . . . . . . . . . 69
3.2.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
3.3 MIU in a Monetary Union . . . . . . . . . . . . . . . . . . . . . . . . 90
3.3.1 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
v3.3.2 Positive Analysis of Fiscal Shocks . . . . . . . . . . . . . . . . 97
3.3.3 Welfare of Fiscal Shocks . . . . . . . . . . . . . . . . 110
3.3.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
3.4 Comparison of Exchange Rate Regimes . . . . . . . . . . . . . . . . . 116
3.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
4 Fiscal Policy in a Cash-in-Advance Economy 125
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
4.2 CIA under Flexible Exchange Rates . . . . . . . . . . . . . . . . . . . 126
4.2.1 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
4.2.2 Positive Analysis of Fiscal Shocks . . . . . . . . . . . . . . . . 129
4.2.3 Welfare of Fiscal Shocks . . . . . . . . . . . . . . . . 146
4.2.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
4.3 CIA in a Monetary Union . . . . . . . . . . . . . . . . . . . . . . . . 156
4.3.1 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
4.3.2 Positive Analysis of Fiscal Shocks . . . . . . . . . . . . . . . . 157
4.3.3 Welfare of Fiscal Shocks . . . . . . . . . . . . . . . . 162
4.3.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
4.4 Comparison of Exchange Rate Regimes . . . . . . . . . . . . . . . . . 167
4.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174
5 Conclusion 177
5.1 Main Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
5.2 Possible Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181
5.3 Final Remarks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
A Appendix to Chapter 3 185
A.1 Log-Linear Long Run System (FLEX) . . . . . . . . . . . . . . . . . 185
A.2 Short Run System . . . . . . . . . . . . . . . . . 188
A.3 Log-Linear Short Run System (MU). . . . . . . . . . . . . . . . . . . 189
Bibliography 190
viList of Tables
3.1 Long Run Differences and Terms-of-Trade . . . . . . . . . . . . . . . 42
3.2 Positive Analysis for †=1 . . . . . . . . . . . . . . . . . . . . . . . . 70
3.3 Effects on overall welfare . . . . . . . . . . . . . . . . . . . . . . . . . 83
3.4 †" driven effects on overall welfare . . . . . . . . . . . . . . . . . . . 87
3.5 Domestic and foreign optimality conditions . . . . . . . . . . . . . . . 94
3.6 World aggregates depending on † . . . . . . . . . . . . . . . . . . . . 105
4.1 World aggregates depending on ‚ . . . . . . . . . . . . . . . . . . . . 137
4.2 Effects on overall welfare, ‚=1, permanent expansion . . . . . . . . 152
4.3 World aggregates depending on money demand specification . . . . . 158
viiviiiList of Figures
3.1 Effect of s2[0;1] on short run consumption. . . . . . . . . . . . . . . 63
3.2 Effect of s2[0;1] on short run output. . . . . . . . . . . . . . . . . . 64
3.3 Effect of s2[0;1] on the short run trade balance. . . . . . . . . . . . 66
3.4 Effect of s2[0;1] on long run consumption. . . . . . . . . . . . . . . 68
3.5 Effect of s2[0;1] on long run production. . . . . . . . . . . . . . . . 69
3.6 Welfare effects of a permanent shock, †=1 (MIU) . . . . . . . . . . . 76
3.7 Effect of s2[0;1] on the trade balance. . . . . . . . . . . . . . . . . . 78
3.8 Overall utilities, permanent shock (MIU) . . . . . . . . . . . . . . . . 85
3.9 Effect of † on overall welfare. . . . . . . . . . . . . . . . . . . . . . . . 114
3.10 Short run utility differentials . . . . . . . . . . . . . . . . . . . . . . . 118
3.11 Long run utility differentials . . . . . . . . . . . . . . . . . . . . . . . 120
3.12 Overall utility differentials . . . . . . . . . . . . . . . . . . . . . . . . 121
4.1 Short run exchange rate in a CIA economy . . . . . . . . . . . . . . . 135
4.2 Permanent Fiscal Expansion, CIA, ‚=1 . . . . . . . . . . . . . . . . 140
4.3 Short run trade balance in a CIA economy . . . . . . . . . . . . . . . 143
ix4.4 Permanent Fiscal Expansion, CIA, ‚=1 . . . . . . . . . . . . . . . . 145
4.5 Welfare effects of a permanent shock, ‚=1 (CIA) . . . . . . . . . . . 150
MU FLEX4.6 Short run consumption differentials, c˜ ¡c˜ . . . . . . . . . . . 160t t
4.7 Comparison of the trade balance response in CIA economies . . . . . 162
4.8 Effect of ‚ on overall welfare . . . . . . . . . . . . . . . . . . . . . . . 165
4.9 Short run utility differentials, permanent expansion . . . . . . . . . . 168
4.10 Long run utility differentials, permanent expansion . . . . . . . . . . 170
4.11 Overall utility differentials, permanent expansion . . . . . . . . . . . 171
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