NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Exchange-Rate Management Viewed as Tax Policies

Jacob A. Frenkel, Assaf Razin

NBER Working Paper No. 2653 (Also Reprint No. r1255)
Issued in July 1988
NBER Program(s):   ITI   IFM

The paper develops an analytical framework which demonstrates that the various forms of exchange-rate management are equivalent to corresponding tax policies. To highlight the salient issues, we consider two specific categories of exchange-rate policies. The first is a dual exchange-rate regime, which separates exchange rates for commercial and for financial transactions, and the second is a unified exchange-rate system in which the country unilaterally pegs its exchange rate at the same rate for all transactions. We show that the dual exchange rate policies can be usefully cast as distortionary taxes on international borrowing, and a unified pegged exchange-rate policies can be usefully cast as lump-sum tax cum subsidy policies. The equivalence between the various characteristics of exchange-rate management and tax management suggests that exchange-rate analysis could be usefully incorporated into the broader framework of the analysis of fiscal policies. A two-country model of the world economy is used to demonstrate the international transmission mechanism of these policies.

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Document Object Identifier (DOI): 10.3386/w2653

Published: European Economic Review, Vol. 33, pp. 761-781, April 1989. citation courtesy of

 
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