Debt Targeting in a Small Open Economy
نویسنده
چکیده
This paper considers a small open economy where government pursues debt targeting policy. In this setting, I find the optimal debt targeting rule crucially hinges on the assumption of bond market structure, i.e. whether household can purchase state-contingent bond. In addition, the country’s foreign asset holding and government’s debt level may have substantial impact on the optimal debt targeting rule. Furthermore, I derive analytical expressions for the fiscal sustainability condition and find it depends on the fiscal adjustment speed and the tax revenue elasticity.
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