On the International Dimension of Fiscal Policy

Gianluca Benigno and Bianca de Paoli

Journal of Money, Credit and Banking, 2010, vol. 42, issue 8, 1523-1542

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.

Date: 2010
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https://doi.org/10.1111/j.1538-4616.2010.00352.x

Related works:
Journal Article: On the International Dimension of Fiscal Policy (2010)
Working Paper: On the International Dimension of Fiscal Policy (2009)
Working Paper: On the International Dimension of Fiscal Policy (2009)
Working Paper: On the international dimension of fiscal policy (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:42:y:2010:i:8:p:1523-1542

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