### 经济代写|宏观经济学作业代写Macroeconomics代考|FISCAL DEFICITS, INFLATION

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## 经济代写|宏观经济学作业代写Macroeconomics代考|Fiscal Deficits under Fixed and Flexible Exchange

If a country adopts a fixed exchange rate regime, the fiscal deficit financed by issuing money will result in a loss of international reserves. This happens because, as people begin to have more money than they need for their transactions, they try to invest in other financial alternatives, some of them abroad. To do so, investors first need to

convert domestic money into foreign currency, but when they do, the exchange rate tends to depreciate.

To keep the local currency from depreciating (i.e., to maintain the exchange rate), the central bank needs to intervene, selling reserves. Therefore, if reserves are available, the exchange rate will be able to remain fixed, and the country will avoid inflation. However, if the deficit persists and reserves are depleted, the central bank will have no choice but to devalue its currency-or let the exchange rate float, changing from a fixed system to a flexible one. Ultimately, it will not be possible to avoid inflation.

With a free or floating exchange rate system, a persistent deficit is also directly financed through monetary issuance. However, since in this case the central bank does not undertake actions to maintain the exchange rate, it will continuously depreciate. This will increase domestic prices, especially the prices of those goods that are tradable internationally, such as export goods, and those that are imported or substitute imports.

In the end, the fiscal deficit will lead to higher inflation rates. This is equivalent to financing the deficit with a tax-the inflation tax-that the government “charges” those who keep national currency as cash or in their bank accounts. In other words, since financing fiscal deficits by issuing money leads to a higher inflation rate, this sort of financing will result in a reduction of the value of the national currency maintained by the public. From a governmental point of view, such a tax has the advantage of not needing legislative approval or requiring further administrative costs for its application. However, it is an inefficient and regressive tax, since inflation affects those who have the least to a greater extent than those who have more. This is because the poor, having less chance of saving and keeping their money in the bank or in assets that are protected from inflation (as those of higher means do), generally keep a greater proportion of their money as cash. By doing so, they also pay a greater proportion of their income as inflation tax than those who have higher income. This is what we mean when we say that an inflation tax is a very regressive tax.

## 经济代写|宏观经济学作业代写Macroeconomics代考|Balance of Payments Crisis

The collapse of a fixed exchange rate regime is a balance of payments crisis, which occurs when the central bank faces a progressive depletion of its international reserves and is forced to give up the fixed exchange rate. If the public anticipates such a collapse, individuals who own national money will be quick to exchange it for foreign currency, usually US dollars. This phenomenon is known as a speculative attack, which depletes the foreign currency reserves of the central bank or takes them to a minimum level.

A good example of a balance of payments collapse was Mexico in late 1994 and early 1995 . In contrast to the recurring crises in Argentina, which were mainly due to excessive spending in the public sector, Mexico’s problems did not originate in a large fiscal deficit (in fact, the budget was almost in balance) but rather in an unusual expansion of private spending, fueled by a credit boom.

Central bank reserves exceeded $\$ 20$billion for most of 1993 and peaked at$\$29$ billion in March 1994 , partly because of Mexico’s integration with the United States and Canada in the North American Free Trade Agreement (NAFTA) in January 1994. At that time, Mexico was also going through the last stages of applying for membership in the Organisation for Economic Co-operation and Development (OECD).

The economic reforms of the previous decade induced a low rate of inflation and a reduction of the fiscal deficit. These economic conditions, coupled with Mexico’s increased international openness and favorable position in the international financial markets, contributed to the high levels of capital inflows into the country in the early $1990 \mathrm{~s}$.

## 经济代写|宏观经济学作业代写Macroeconomics代考|Argentina’s Crises

Another example of a balance of payments crisis, although with even more painful nuances, occurred in Argentina between 2001 and 2002, when the currency board (a fixed exchange rate scheme set by law) in force

since the early 1990 s collapsed. During the first half of 2001 central bank reserves had remained stable at around \$24 billion. However, three continuous years of recession, high rates of tax evasion, and government reluctance to lower levels of public spending made the fiscal deficit uncontrollable. This explains the fact that between July and August of that year, international reserves diminished by$\$6.5$ billion-almost a third of their initial value. An IMF bailout program in September resulted in reserves rebounding to $\$ 21$billion and allowed the fixed exchange rate system to continue. Sadly, confidence in the economic program soon faded. The country was unable to resort to external financing (or issuing government debt to international investors) because the country risk premium was fifteen percentage points higher than a US treasury bond, a level of risk that was unacceptable to most investors. The country also faced prohibitive costs for internal borrowing (or issuing government debt to national investors) as the country risk premium skyrocketed. This reflected the fact that government debt had become a very risky investment to make and therefore very costly for the government to pay back to investors. As a result, the authorities initially met the increasing demand for foreign currency by selling the country’s reserves at an average rate of$\$400$ million per month.

## 经济代写|宏观经济学作业代写Macroeconomics代考|Balance of Payments Crisis

1994 年末和 1995 年初的墨西哥就是国际收支崩溃的一个很好的例子。与阿根廷反复出现的危机（主要是由于公共部门的过度支出）相比，墨西哥的问题并非源于巨额财政赤字（事实上，预算几乎是平衡的），而是源于私人部门的异常扩张。消费，由信贷繁荣推动。

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