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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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Identification Number: 10.1111/j.1538-4616.2010.00352.x


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
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Additional Information: © 2010 The Ohio State University.
Divisions: Economics
Subjects: H Social Sciences > HJ Public Finance
Date Deposited: 14 Mar 2011 16:41
Last Modified: 20 Jul 2021 00:51

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