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

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  • Liu, Xuan
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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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 36 (2013)
Issue (Month): C ()
Pages: 47-67

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Handle: RePEc:eee:jimfin:v:36:y:2013:i:c:p:47-67

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Time consistency; Optimal monetary and fiscal policy; Small open economy;

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