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On the international dimension of fiscal policy

Benigno, Gianluca and De Paoli, Bianca (2010) On the international dimension of fiscal policy. Journal of Money, Credit and Banking, 42 (8). pp. 1523-1542. ISSN 0022-2879

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Abstract

This paper analyzes the international dimension of fiscal policy in a small open economy framework. We consider the case in which the government finances its spending by levying distortionary taxes and issuing state-contingent debt. While in a closed economy taxes are essentially invariant, in an open economy taxes can be as volatile as output. This is because the presence of a terms of trade externality introduces efficient fluctuations in the consumption-leisure wedge driven by movements in the real exchange rate. As a result, the optimal fiscal rule suggests that taxes should be varied to replicate these fluctuations.

Item Type: Article
Official URL: http://www.wiley.com/bw/journal.asp?ref=0022-2879
Additional Information: © 2010 The Ohio State University.
Library of Congress subject classification: H Social Sciences > HJ Public Finance
Sets: Departments > Economics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 14 Mar 2011 16:41
URL: http://eprints.lse.ac.uk/33344/

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