If a country needs to demonstrate to the world that it is fiscally prudent, however, because doing so will prevent speculation against its own currency and maintain the inflow of foreign currency, then expansionary macroeconomic policies may be impossible

Economics Dec 15, 2020

If a country needs to demonstrate to the world that it is fiscally prudent, however, because doing so will prevent speculation against its own currency and maintain the inflow of foreign currency, then expansionary macroeconomic policies may be impossible. Does this mean that developing countries cannot use expansionary macroeconomic policies. relate to Argentina.

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Expert Solution

Definitely developing countries can use expansionary fiscal policy by reducing taxes and inducing higher spending albeit in marginal amounts and at same time adopt contractionary monetary policy to offset the intended effects of hyperinflation in case of Argentina and at same time ensure exchange rate stabilisation. To remain fiscally prudent the government can resort to automatic stabilizers and structural reforms as against expansionary fiscal policy.

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