FISCAL STABILIZATION AND EXCHANGE-RATE INSTABILITY - A THEORETICAL APPROACH AND SOME POLICY CONCLUSIONS USING MEXICAN DATA

We construct a perfect foresight intertemporal general equilibrium model designed to analyze the impact of reductions in piblic spending. The model incorporates public infrastructure that enters private productions and a reserve-based government exchange rate policy. The model is estimated for Mexico and a three-year benchmark equilibrium is computed. Counterfactual simulations are carried out, with one of the conclusions being that a reduction in government spending can be inflationary. The results are sensitive to the elasticity of private output with respect to government infrastructure. © 1990.