Global Effects of National Stabilization Policies under Fixed and Floating Exchange Rates

Abstract

This paper deals with international effects of two types of stabilization policies: monetary expansion directed towards the demand side and a reduction in payroll taxes directed towards the supply side. The analysis focuses on employment, relative prices and welfare issues. It rests on a simple intertemporal general equilibrium model of two countries that includes a specific micro theory of money. Under floating exchange rates, a country’s employment is insulated from both policies abroad, but its consumption generally changes. Under fixed exchange rates, no such insulation prevails; while monetary expansion is generally expansionary, reduced payroll taxes constitute a beggar-thy-neighbor policy. In both systems, the welfare of a country may decrease although its employment increases—an “immiserizing expansion” may occur. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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