Suchergebnisse

This paper analyses the international dimension of fiscal policy using a small open economy framework in which the government finances its spending by levying distortionary taxation and issuing non-state-contingent debt. The main finding of the paper is that, once the open economy aspect of the policy problem is considered, it is not optimal to smooth taxes following idiosyncratic shocks. Even when prices are flexible and inflation can costlessly act as a shock absorber to restore fiscal equilibrium, the presence of a terms of trade externality lead to movements in the tax rate. Also in contrast with the closed economy, the introduction of sticky prices can reduce the optimal volatility of taxes.

This paper revisits the ability of consumption habits to resolve the forward premium anomaly as documented in the literature. We show that the favourable results obtained in an endowment setting crucially depend on having persistent dynamics in excess consumption, and do not appear to hold up in a production economy with nominal rigidities. The inability of such models to match equity and term premium has often been emphasized in the closed economy literature. Our findings suggest that this shortcoming also extends to open economy models and their ability to explain foreign exchange premia.