Time consistency of optimal monetary and fiscal policy in a small open economy

Xuan Liu

Journal of International Money and Finance, 2013, vol. 36, issue C, 47-67

Abstract: This paper characterizes conditions under which optimal monetary and fiscal policy is time consistent in a stylized small open economy with a flexible foreign exchange rate regime. It shows that these conditions depend on the way in which leisure is assumed to enter preferences and/or on the process which productivity is assumed to follow. This paper further argues that these conditions may fail to be sufficient if the small open economy implements a fixed foreign exchange rate regime. Thus, a credible fixed exchange rate regime does not necessarily help render optimal policy time consistent.

Keywords: Time consistency; Optimal monetary and fiscal policy; Small open economy (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:36:y:2013:i:c:p:47-67

DOI: 10.1016/j.jimonfin.2013.03.007

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