Fiscal Consolidation in an Open Economy

Coordinating Monetary and Fiscal Policies in an Open Economy

Delegating monetary policy to an independent central bank will not incur coordination problems with fiscal policy. The fiscal authority faces no incentive to try and expand the economy, as its efforts will be quickly countered by a contractionary monetary policy to maintain the inflation target. We argue that this proposition is not true in an open economy. When the external sector is added to ...

Optimal Fiscal Policy and Amplification in a Small Open Economy∗

We study optimal fiscal policy in a small open economy characterized by two main frictions – incomplete financial markets and an inability of the government to commit to policy. Our main contribution is to show that in this environment, the best sustainable policy can amplify and prolong shocks to output. In particular, the government’s credibility not to expropriate foreign capital endogenousl...

Efficient Expropriation: Sustainable Fiscal Policy in a Small Open Economy

We study a small open economy characterized by two empirically important frictions – incomplete financial markets and an inability of the government to commit to policy. We characterize the best sustainable fiscal policy and show that it can amplify and prolong shocks to output. In particular, even when the government is completely benevolent, the government’s credibility not to expropriate cap...

Efficient expropriation: Sustainable fiscal policy in a small open economy

Sustainable Fiscal Policy in a Small Open Economy

We study a small open economy characterized by two main frictions – incomplete financial markets and an inability of the government to commit to policy. We characterize the best sustainable fiscal policy and show that it can prolong shocks to output. In particular, the government’s credibility not to expropriate capital endogenously varies with the state of the economy and may be “scarcest” dur...