Quadrilemma not Trilemma: Fiscal Policy Matters

Hao Jin ()

No 2016-003, CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: This paper examines the interactions between fiscal policy and the open economy macroeconomic policy trilemma in a small open economy dynamic stochastic general equilibrium model. I show that the trilemma policy regime choices require fiscal accommodation. Otherwise, when future budget fail to stabilize government liabilities, fiscal imbalance generates exchange rate depreciation, regardless of monetary and capital account policy regimes. In this active fiscal policy regime, fiscal and monetary policy interact to determine the magnitude of exchange rate depreciation, while monetary policy and capital controls manage the timing of the depreciation.

Keywords: Trilemma; Fiscal Policy; Capital Account Policy; Exchange Rate Stability; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E62 F33 F38 F41 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2016-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:inu:caeprp:2016003

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