Benigno, Gianluca and De Paoli, Bianca
On the international dimension of fiscal policy.
CEP Discussion Paper,
Centre for Economic Performance, London School of Economics and Political Science, London, UK.
This paper analyses the international dimension of fiscal policy using a small open economy framework in which the government finances its spending by levying distortionary taxation and issuing non-state-contingent debt. The main finding of the paper is that, once the open economy aspect of the policy problem is considered, it is not optimal to smooth taxes following idiosyncratic shocks. Even when prices are flexible and inflation can costlessly act as a shock absorber to restore fiscal equilibrium, the presence of a terms of trade externality lead to movements in the tax rate. Also in contrast with the closed economy, the introduction of sticky prices can reduce the optimal volatility of taxes.
||© 2009 The authors
||optimal policy, fiscal policy, small open economy
|Library of Congress subject classification:
||H Social Sciences > HJ Public Finance
|Journal of Economic Literature Classification System:
||E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
||Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Departments > Economics
||06 Jul 2010 16:05
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