Optimal monetary and fiscal policy at the zero lower bound in a small open economy

Saroj Bhattarai and Konstantin Egorov ()

No 260, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: We investigate open economy dimensions of optimal monetary and fiscal policy at the zero lower bound (ZLB) in a small open economy model. At positive interest rates, the trade elasticity has negligible effects on optimal policy. In contrast, at the ZLB, the trade elasticity plays a key role in optimal policy prescriptions. The way in which the trade elasticity shapes policy depends on the government's ability to commit. Under discretion, the increase in government spending at the ZLB depends critically on the trade elasticity. Under commitment, the difference between future and current policies, both for domestic inflation and government spending, is smaller when the trade elasticity is higher.

JEL-codes: E31 E52 E58 E61 E62 E63 F41 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2016-01-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon, nep-opm and nep-pbe
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:260

DOI: 10.24149/gwp260

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