Savers, Spenders and Fiscal Policy in a Small Open Economy

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...

Optimal and Time Consistent Monetary and Fiscal Policy in a Small Open Economy

This paper shows that optimal fiscal and monetary policy is generally time consistent in a standard small open economy. Further, there exist many maturity structures of public debt capable of rendering the optimal policy time consistent. This result is in sharp contrast with that obtained by others in the context of closedeconomy models. In the closed economy, the time consistency of optimal mo...