Optimal fiscal policy and different degrees of access to international capital markets

Karlygash Kuralbayeva

No 60, OxCarre Working Papers from Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford

Abstract: Empirically, the cyclical pattern of scal policy differs between developed and developing countries, with in particular much greater pro-cyclicality and volatility of public investment in developing countries. In this paper I provide a theoretical explanation for the observed differences by analyzing optimal fiscal policy under different degrees of access to world capital markets. If the supply of foreign capital is elastic, as in a developed country, then it is optimal to adjust to an adverse external shock by borrowing from abroad to finance public expenditure and cutting taxes to smooth private consumption. If the supply of foreign capital is inelastic, however, as in a developing country, the optimal adjustment policy is to reduce public investment (by much more than public consumption) and to raise consumption taxes.

Keywords: public investment; public consumption; scal policy; procyclicality; natural resources, external shocks (search for similar items in EconPapers)
JEL-codes: E32 E62 F41 H30 H54 Q33 Q43 (search for similar items in EconPapers)
Date: 2011-06-28
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (4)

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Journal Article: Optimal fiscal policy and different degrees of access to international capital markets (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:oxf:oxcrwp:060

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