Optimal Government Spending Reversal in a Small Open Economy

Shigeto Kitano and Kenya Takaku
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Kenya Takaku: Graduate School of Economics, Nagoya University, Japan

No DP2011-26, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: This paper reexamines optimal debt stabilization policy in a small open economy borrowing from abroad. We incorporate spending reversals as a policy option available to policy-makers for stabilizing public debt. Results show that spending reversals can be welfare-improving and that there exists an optimal degree of spending reversal if the debt elasticity of the country-specific risk premium is high. The tradeoff between smoothing the tax rate and stabilizing the sovereign interest rate in the discussion of optimal tax rate policy (Bi, 2010) does not arise. Spending reversals can lower both the tax rate volatility and that of the interest rate.

Keywords: Sovereign debt; Debt stabilization; Welfare; Spending reversals; Small open economy (search for similar items in EconPapers)
JEL-codes: F41 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2011-09, Revised 2012-10
New Economics Papers: this item is included in nep-cba, nep-opm, nep-pbe and nep-pub
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https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2011-26.pdf Revised version, 2012 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:kob:dpaper:dp2011-26

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