Sustainable Fiscal Policy in a Small Open Economy
نویسندگان
چکیده
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” during recessions. This increased threat of expropriation depresses investment and prolongs downturns. ∗We thank comments and suggestions from Andy Atkeson, Doireann Fitzgerald, William Fuchs, PierreOlivier Gourinchas, Hugo Hoppenhayn, Pat Kehoe, Narayana Kocherlakota, Enrique Mendoza, Marcelo Oviedo, Chris Phelan, Ken Rogoff, Paul Romer, Andy Rose, Aleh Tsyvinsky, Carlos Vegh and Ivan Werning. We also thank seminar participants at Berkeley, Board of Governors, Cornell, Harvard, Princeton, MIT, NBER summer institute, SED, Minneapolis Fed, New York University, Boston University, New York Federal Reserve Bank, Northwestern University, University of California at Santa Cruz, University of Texas, Philadelphia Fed, and Universidad Torcuato Di Tella for comments.
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