External Debt and Stabilizing Macroeconomic Policies

Alessandro Piergallini

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates the dynamic effects of fiscal and monetary feedback policy rules in a small open economy with flexible exchange rates and risk premia on external debt. It is shown that equilibrium uniqueness and stability occur under locally Ricardian fiscal policies regardless of the degree of reaction of nominal interest rates to inflation, in contrast with closed-economy environments. Fiscal revaluation mechanisms of the type predicted by the fiscal theory of the price level are precluded by international parity conditions. As a result, locally non-Ricardian fiscal policies are destabilizing even under an accommodating monetary policy stance.

Keywords: Fiscal-Monetary Interactions; Foreign Debt; Equilibrium Determinacy. (search for similar items in EconPapers)
JEL-codes: E31 E63 F41 (search for similar items in EconPapers)
Date: 2015-11-10
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:89272

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