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Time consistency of optimal monetary and fiscal policy in a small open economy

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  • Liu, Xuan

Abstract

This paper characterizes conditions under which optimal monetary and fiscal policy is time consistent in a stylized small open economy with a flexible foreign exchange rate regime. It shows that these conditions depend on the way in which leisure is assumed to enter preferences and/or on the process which productivity is assumed to follow. This paper further argues that these conditions may fail to be sufficient if the small open economy implements a fixed foreign exchange rate regime. Thus, a credible fixed exchange rate regime does not necessarily help render optimal policy time consistent.

Suggested Citation

  • Liu, Xuan, 2013. "Time consistency of optimal monetary and fiscal policy in a small open economy," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 47-67.
    • Handle: RePEc:eee:jimfin:v:36:y:2013:i:c:p:47-67
    DOI: 10.1016/j.jimonfin.2013.03.007
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